Pressure Mounting For Action From The ECB Thursday

US stocks were weak yesterday after August ISM Services PMI fell to 49.6 vs. 50.0 forecast. Most of the damage was done however with the USD gaining against most pairs and has so far held onto those gains. Focus has switched from the US Fed to the ECB Meeting on Thursday with talk of an ECB bond purchase program to be announced. Looking ahead, Q2 Productivity forecast at 1.8% vs. 1.6% previously.

The Euro (EUR) The EUR/USD fell from the lofty 1.2600 heights overnight as Moody’s downgraded the outlook for the European Union. Also hurting was a German article stating the ESM was illegal. This is ahead of the ECB meeting on Thursday where expectations are mounting for a big announcement. Caution should be employed given last month’s disappointment that led to a 300 pip fall for the EUR/USD post ECB meeting.

The Sterling (GBP) The weakness of the Euro spread to the GBP and we saw a pullback from 1.5900 to 1.5850. Helping support was the August PMI services which jumped to 53.7 vs. 51.0 previously. This combined with a stellar manufacturing survey on Monday have helped improve the outlook and sentiment toward the Pound. Looking ahead, July Retail Sales forecast at -1.5% vs. -1.2% y/y.

The Japanese Yen (JPY) The USD/JPY rallied on the back of USD strength but the weak data is helping QE3 advocates and could hurt the Dollar if it continues. The Nonfarm payrolls will be closely watched on Friday but also the EUR/JPY will be in play over the next two days and could be important for overall Yen strength.

Australian Dollar (AUD) The market continued to sell into any AUD/USD strength with a post RBA rally yesterday leading to a heavy sell off down to 1.0200. The RBA noted some caution about China and recent weak data but also that the Australian economy was expected to grow and that inflation was forecast at the desired level. Also they noted they are waiting to see the effects of the recent rate cuts on the economy before considering further cuts. UPDATE Australian Q2 GDP at 0.6% vs. 0.7% forecast Q/Q.

Oil and Gold (XAU) Gold remained in a tight range at recent highs with traders buying on ECB bond buying speculation but are not yet strong enough to break $1700. OIL/USD fell back with risk off trade down to $95 a barrel supports.

Pairs To Watch
EUR/USD: Range trading into ECB? 1.2500-1.2600

AUD/USD: New downtrend starting?

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