Ahead of UK rate Decision
As nervousness on UK fiscal discipline looms and the UK economy continues to lag behind other G7 economies investors will look closely at the BoE’s view on inflation and most importantly the prospects of more quantitative easing(liquidity injected to the banking system).
Bearish-If the BoE will stress the need for more quantitative easing which is an effective money printing this will be strongly bearish for the Sterling especially against the Dollar and the Yen which enjoy strong demand in a risk aversion play.
Bullish- If the BoE governor will outline he sees more upside risk of inflation and will express concern over the possibility that long term UK inflation prospect will rise above the 3% limit of the BoE this could mean the BoE might move to raise rates even before the UK fully recovers. This will enable the sterling to recover and possibly settle above 1.5.
Ahead of ECB rate decision and EU GDP
Most of the focus around the EU is the Greek debt issue, investors are eager to see if EU members will be able to secure funding for Greece and force Greece to more fiscal discipline. Currently the discussions have reached a dead end with EU members failing to sort out a solution. In the ECB meeting investors will be keen to see if the ECB will proceed with its exit of stimulus and even mention higher rates in the distant future or resume to a more dovish outlook as to avoid expectation of higher rates that could weigh more on EU sovereign debt problems.
Bullish-The EU GDP is due at 10:00 GMT and investors are pricing a -2.1% growth YoY in Q4, if the EU GDP will majorly outpace forecast it could trigger a bullish move. If the ECB will stress the importance of exiting stimulus it will also perceived as bullish. However most importantly and probably “the market mover” is the attempt by EU members to solve the Greek issue. If EU members will be able to settle a rescue plan for Greece than this would be a bullish sign and since the Euro already found support around 1.34-1.36 any of those events has the potential to trigger a classic technical rebound.
Bearish- A dovish outlook for the ECB outlining stimulus is still needed and stressing rate will remain low for an extended period could place further pressure on the EU and signal sovereign debt problems could propone monetary tightening. Most importantly if efforts to reach a solution on the Greek debt issue will fail this could move the Euro to retest the 1.34 support which held it range bound in recent days.
In Thursday market eyes will focus both on the EU and UK rate decisions. Both the Euro and the Sterling have been under strong selling pressure lately the Euro pressed down by the Greek debt issue and the Sterling by the looming political instability. The selling pressure on the Euro eased somewhat in recent hours after meetings between EU representatives on the Greek issue spurred rumors an agreement might be at hand providing support for euro to hold above the 1.35. Trade for the Sterling however remained nervous. The cable fell below the 1.5$ support against the Dollar and reached close to a one year low against the Yen as fears over UK political stability curbed bets on fiscal diceplin and triggered crowded short selling on the sterling.