Press Release: Euro Waits at Key Resistance with All Eyes on ECB Rate Decision

The Euro sits at trend-defining resistance against the US Dollar as markets anxiously look ahead to the ECB policy announcement for guidance.

Talking Points

• ECB Likely to Disappoint Hopes for Fully Realized Bond-Buying Scheme
• Bank of England Set to Keep Policy on Hold as QE Boost, FLS Play Out
• US Service-Sector ISM, ADP Jobs Data to Shape Outlook Before NFP

Volatility looks to be in the cards after another slow start to the trading week, with all eyes are on the European Central Bank monetary policy announcement. Expectations are running high – with EURUSD perched at key resistance – amid hopes that the central bank will finally deliver the bond-buying program alluded to in officials’ commentary over recent weeks and meant to contain borrowing costs for debt-strapped Eurozone member states. On balance, a disappointment on this front appears likely.

The bond purchase scheme is contingent on a formal bailout request by those countries whose bonds are to be supported by the central bank, meaning it would be functionally useless if Germany’s Constitutional Court rules the ESM rescue fund is incompatible with domestic law. A decision on this matter is expected September 12, so the ECB seems unlikely to risk its credibility by unveiling a program that may be made moot just days later.

That shifts the focus to growth-boosting policies, where possibilities include another round of LTROs, a further relaxation of collateral requirements for bank funding, and/or another outright interest rate cut. A strong effort to bolster output is likely to boost risk appetite considering the recession in the Eurozone amounts to the most significant headwind facing global growth this year.

Such a scenario is likely to offer a lift to sentiment-linked currencies including the Australian, Canadian and New Zealand Dollars. As for the Euro, the single currency may find support against havens including the US Dollar and Japanese Yen while suffering losses against its higher-yielding counterparts if stimulus is expanded (although gains may prove short-lived as the dilutive implications of monetary expansion factor in). Needless to say, if ECB policymakers opt not to move forward with growth-supportive measures, the opposite dynamic is likely to play out as risk aversion takes hold anew.

The Bank of England is likewise due to issue its interest rate announcement, but no changes to the existing policy mix as the MPC continues to evaluate the effects of the latest increase in asset purchases (which runs its course in November) and the new Funding for Lending Scheme (FLS). Later in the day, the focus will shift to the ISM Non-Manufacturing gauge of US service-sector growth as well as the ADP Employment report to set the stage for Friday’s critical Nonfarm Payrolls print. Traders continue to interpret US data through the prism of QE3 expectations, with softer outcomes likely to support risky assets (and vice versa).

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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This article was provided by DailyFX.com.