Today’s highlights:
- GDP (QoQ) (EU, 10:00 GMT)
- German Factory Orders (MoM) (GER, 11:00 GMT)
- Interest Rate Decision + BOE QE Total (GB, 12:00 GMT)
- Interest Rate Decision (EU, 12:45 GMT)
- ADP Nonfarm Employment Change (U.S, 13:15 GMT)
- ECB Press Conference (EU, 13:30 GMT)
- Initial Jobless Claims (U.S, 13:30 GMT)
European Central Bank President Mario Draghi’s task today is straight-forward: produce a plan to save the euro. Draghi pledged more than a month ago to do what’s needed to preserve the single currency; now he’s under pressure to follow through with details of a bond-purchase plan to lower borrowing costs in Spain and Italy and prevent a breakup of Europe’s monetary union. Draghi’s plan involves the ECB buying short-dated bonds on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market. Draghi’s rationale for the purchase plan is that ECB interest rates are not being transmitted in most euro-area countries because investors are pricing in the risk of a breakup, something he considers unacceptable. However, the purchases will be carried out under strict conditions however, and only countries which fulfill all the fiscal requirements will be eligible to take part in ECB's program. The central bank will target only government bonds of a maturity up to 3 years, which will be sterilized in order to ward off worries about printing money. The President of the European Council Herman Van Rompuy declared on Wednesday his absolute support for ECB's intervention and criticized the elevated risk premiums of some of the Eurozone countries. He also praised reforms introduced by Spain and Italy.
The only Governing Council member still opposing this solution is German Central Bank Chief Jens Weidmann. In response to the reports of ECB's planned unlimited bond purchases, German chancellor Angela Merkel reiterated her opposition to such a solution. According to Norbert Barthle, a senior lawmaker of Merkel's party CDU, the German leader said however that she would allow for the possibility of temporary bond buying as well as purchases of bonds with short maturities.
EUR/USD: The EUR/USD was trading in the narrow range of 1.26186 and 1.25850 at the time of writing as investors jumped on the sidelines ahead of a critical day for the Euro. The Eurozone will release the much awaited interest rate decision in the Eurozone at 12:45 GMT and the ECB Press Conference at 13:30 GMT. Economists are split over whether policy makers will lower the benchmark rate to a new record low, with 30 of 58 in a Bloomberg survey predicting a quarter-point cut to 0.5 percent and 28 forecasting no change. The ECB’s 23 council members have a full agenda. As well as discussing rates and the modalities of Draghi’s asset-purchase plan, they will also consider new economic projections and decide whether to loosen rules on the collateral banks can submit in return for central bank loans. Investors should be very cautious as huge volatility is expected today ahead of the data in the Eurozone. On the other hand, the U.S will release ADP Nonfarm Employment Change at 13:15 GMT and Initial Jobless Claims at 13:30 GMT the risk event for the USD. If these data came in weaker than expected then, it will add to speculation that the Fed will announce a third round of quantitative easing to jolt the economy. Investors should adopt a wait and see strategy on the market today. The resistance level is at 1.26354 and the support level is at 1.25514.
GBP/USD: The GBP/USD was trading at 1.59004 at the time of writing on reports, the European Central Bank is finalizing plans to buy sovereign bond to ease the debt crisis in big economies like Italy and Spain and signs the U.K. recession is easing. Recent data showed services growth accelerated in August more than economists forecast, adding to the case for the Bank of England to refrain from expanding stimulus today. UK will release its Interest Rate Decision and BOE QE Total at 12:00 GMT. Analysts predict policy makers will keep monetary policy unchanged. Market sentiments for risky assets were boosted when Bloomberg news agency reported that the ECB was planning to launch "unlimited, sterilized" bond purchases, meaning the monetary authority would buy Spanish, Italian or other debt with money elsewhere in the financial system ahead of ECB Press Conference at 13:30 GMT today. Other events likely to bring volatility on the market today are ADP Nonfarm Employment Change and Initial Jobless Claims at 13:30 GMT. If soft U.S data are released, then it may prompt the Fed to announce a third round of quantitative easing to boost the U.S economy. Investors should be very prudent on the market and a wait and see approach will be a good strategy on the pair. The resistance level is at 1.59311 and the support level is at 1.58483.
Oil (WTI): Oil rose for a second day after an industry report showed stockpiles shrank to the lowest in more than five months in the U.S., the world’s biggest crude consumer. The commodity was trading higher at 96.055 at the time of writing after a report showed Australian unemployment unexpectedly declined today and ahead of Interest rate decision in the Eurozone and ECB press conference, where ECB policy makers have agreed on the bond-purchase proposal. The plan involves unlimited purchases of government debt that will be sterilized by removals elsewhere to assuage concerns about printing money, according to two central-bank officials briefed on the plan. Moreover, the U.S will release its ADP Nonfarm Employment Change and Initial Jobless Claims, where weak data may push the Fed to announce a third round of quantitative easing to jolt the economy. Such accommodative policies tend to weaken the dollar by design and send commodities prices rising, especially oil, which shoots up on hopes for sustained demand that comes from a jolted economy and also due to a weaker dollar. Investors should wait for news and data to come in the market to better assess the direction of the commodity. The resistance level is at 97.376 and the support level is at 94.863.
Good Luck in Trading …