• Big Ben Passes The Baton
• Euro Back Under The Cosh
• Bazooka At The Ready?

Let’s not kid ourselves; as forex traders will need no reminding, we are in a period of just two and half days - a confluence comprising two of the most important central bank meetings in a very long time. This is particularly so in the case of today’s ECB meeting, as well as three of the most important US economic data points on the near horizon.

Ahead of Super Mario's next big moment in the spotlight today, when he will be expected to flesh out precisely what he meant last week in saying the ECB would do ‘whatever it takes’ to save the euro, the Federal Reserve took centre stage after the end of the European session yesterday.

Prior to the Federal Open Markets Committee (FOMC) statement, most seasoned market watchers had already priced in their view that the meeting would be yet another staging post on the slow march to a third round of stimulus - possibly as soon as next month. In this regard, they weren’t disappointed. None of the economic data since Bernanke & Co last met has offered any comfort, with yesterday's dispatch from the manufacturing sector merely the latest.

Fed Up

Thus, the Fed - in warning that the world’s largest economy has lost momentum this year - held off announcing any new monetary stimulus measures. The FOMC statement, replete with no mention of new policies, as expected, hinted at information received since they last met in June suggesting that economic activity decelerated somewhat over the first half of this year. The immediate reaction by the U.S. markets to the news that the printing presses won't be fired up just yet, was muted to say the least, even though it was widely expected that the action wouldn't happen until September.

Hence, with no immediate QE on the cards, the U.S. dollar rallied significantly across the board, with sterling, especially, being hit hard. However, the pair has found support around 1.55 this morning from the ascending trend line. Meantime, euro/dollar has fallen back below the 1.2250 area, extending to a session low of 1.2243, last at 1.2240 versus 1.2249.

However, as Craig Erlam of top forex broker Alpari UK remarks, “the euro is trading higher against the dollar this morning, paring some of its losses yesterday. We should see these gains extended further this morning as we near the ECB press conference, with the next resistance area coming around 1.2288.”

ECB -  On Your Marks!

So, next up, the ECB. There have been rumours over the last couple of days that Draghi may follow in Bernanke's footsteps. Despite dropping big hints last week that the ECB will restart the Securities Markets Program (SMP), speculation has increased that no commitment will be made today. If so, this could fire the starting pistol for a Spanish (and even an Italian) exit from the single currency. In which case, given the rally we saw in the euro last week following Draghi's comments, we could see the euro fall all the way back to 1.2041.

More optimistic of a positive ECB move of some kind today, Saxo Bank FX analyst John Hardy nonetheless ponders what is the market pricing in? “My general expectation is that almost regardless of what the ECB does (unless Draghi pulls out a larger bazooka than the market is already expecting),” says Hardy, “the topside potential is in the 1.2500-1.2600 range until proven otherwise.”

Holding back the ECB, of course, the Bundesbank says it is not happy with SMP bond buying or the idea of the European Stability Mechanism being granted a banking licence. But the ECB still has a palette of other technical extend-and-pretend solutions from which to chose, that may have varying degrees of short term effectiveness. If Mario Draghi does stand by his rhetoric, sterling certainly should benefit, and we would expect it to jump over the next couple of weeks.

Finally, Crédit Agricole’s head of global currency strategy, Mitul Kotecha, reminds us of another risk event in the form of the Bank of England, which also decides on policy today. But unlike the ECB, there is little expectation of any action from the MPC.

“Inaction by the BoE will highlight that after a GBP 375 billion in asset purchases there is limited room in the tool kit aside from lowering interest rates further,” opines Kotecha. “A weaker than expected reading for UK July manufacturing confidence weighed on GBP, with the data following a rash of disappointing data releases over recent weeks. I continue to see downside risks to GBP both against the EUR and USD, however. Indeed, my quantitative models reveal that GBP/USD should be trading around 1.5144 while EUR/GBP should be around 0.8242.”

Drew Hillier. Editor, ForexSpace.com