High Degree of Uncertainty Surrounding the ECB Policy Meeting


The Euro tended to consolidate around the 1.23 area in European trading on Wednesday, although there was a high degree of volatility as official rhetoric continued to have a significant impact. There was further opposition within the German government to the ESM being granted a banking licence which triggered some selling pressure on the Euro. There were also comments from ECB head Weidmann not to expect too much from the ECB and that it should not break its mandate, but these comments had been from several weeks previously which dampened the impact to some extent.

As far as the US economic data is concerned, there was a 163,000 increase in ADP employment for July from a revised 176,000 previously which was significantly above expectations. The ISM manufacturing index improved marginally from the previous month, but it held below the benchmark 50.0 level for the second successive month which fuelled expectations of a slowdown in the US and global economy as manufacturing releases remained generally depressed.

The Federal Reserve left policy on hold at the latest FOMC meeting with another 11-1 vote for rates to be left on hold as Lacker dissented again, this time objecting to the stated expectations that rates would be left at extremely low levels through 2014. There were no hints of any further policy action by the Fed and no further extension to 2015, although it promised to monitor developments closely. There were also concerns surrounding the economy which was deemed to have decelerated with a slowdown in consumer spending. In this context, there will be the scope for fresh measures to be taken if the economy deteriorates further and inevitably the global economic trends will also be watched very closely as the Fed edges closer to action.

The statement was less dovish than expected and the US dollar gained ground with the Euro retreated to test support in the 1.2225 region before correcting slightly higher.

There was still a high degree of uncertainty surrounding the ECB policy meeting on Thursday and the potential for high volatility given uncertainties surrounding potential policy options. Markets are expecting some form of ECB action and failure to deliver could seriously undermine risk appetite while any aggressive move to bring Euro-zone yields down could provide a sharp boost to the Euro.


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The dollar was able to resist a renewed test of support below 78 against the yen on Wednesday and consolidated just above the 78 level ahead of the Fed decision. The US gained relief support following the unchanged Fed policy and pushed to near 78.50.

There were further warnings from Japanese officials over the possibility of intervention as Japan remains concerned surrounding the impact of yen strength on the economy with the threat of continuing deflationary pressure. Safe-haven demands will remain important and the yen will gain support if there are further tensions within the Euro-zone.


Sterling was unable to make significant headway in early Europe on Wednesday, undermined initially by a weaker than expected reading for the Nationwide house-price index of -0.7% for July.

The PMI index for the manufacturing sector was much weaker than expected with a reading of 45.4 from 48.4 the previous month. This was the lowest reading for 38 months and will reinforce fears surrounding the economic outlook.

The most likely outcome is that the Bank of England will keep policy on hold at the latest monetary meeting on Thursday. Even if there are no changes, there will be expectations that rates could be cut later in the year which will tend to sap currency support.

Sterling was put on the defensive by the data with lows towards 1.56 against the dollar and dipped further following the Federal Reserve meeting as Sterling also remained on the defensive against the Euro with a two-week lows near 0.79.

Swiss franc

The dollar found support below 0.9750 against the franc on Wednesday and pushed to a high around 0.9830 later in the US session. The Euro was able to make marginal gains during the day.

The ECB interest rate decision will be watched very closely on Thursday and non-conventional measures to support the Euro-zone economy could curb capital outflows from the Euro area which would also have an impact in potentially easing buying pressure on the Swiss franc. Underlying tensions, however, could return very quickly if the ECB disappoints.


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Australian dollar

The Australian dollar was blocked in the 1.0540 area against the US currency on Wednesday and retreated to lows near 1.0450 following the US Federal Reserve decision as commodity prices also came under selling pressure.

The domestic economic data provided support with a stronger than expected increase of 1.0% for retail sales following a revised 0.8% gain previously while the trade account also nudged into surplus for the latest month. In this context, the Australian currency was able to find support below the 1.0450 level.


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