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What ammunition do the ECB have in their armoury?

The main focus on the economic calendar today will be the European Central Banks monthly meeting on interest rates. So far the ECB has resisted in following the format of aggressively cutting interest rates and introducing "unconventional" measures such as Quantitative Easing. Today they are expected to cut interest rates by at least 25 basis points and possibly announce other measures such as buying debt to stimulate growth in the euro zone. Some analysts are expecting a dramatic move from the ECB in relation to the purchase of bonds- others feel that the ECB could maintain their cautionary approach. Division has recently crept into the ECB committee on the action required and in the light of continuing weak data and a sharp downgrading in GDP forecasts you feel that today clarity and action is required. We have already witnessed selling pressure on the euro against sterling and the dollar as we head towards the meeting.

We also at midday have the result of the UK MPC meeting with no change expected. Comments may be made on the effectiveness thus far on the introduction of Quantitative Easing but no changes to current QE measures are anticipated. It is felt by some analysts that the QE cash generated is failing to get through to the real economy due to banks hoarding the extra cash- credit conditions remain tight and although it is too early to effectively judge QE the Treasury will be concerned.

Focusing on economic data today we have seen retail sales in Europe fall by a record amount over the last 12 months- sales were down 4.2% between March 2008 and 2009- this is adding to selling pressure on the euro. In the UK yesterday we saw an improvement in the services sector boosting hopes of an economic revival in the UK and helping sterling to edge higher across the board. Norway cut interest rates by 50 basis points as expected and the Canadian finance minister confirmed that there were no plans to introduce QE helping the CAD to strengthen against the USD.

Later this evening we get the results of the stress testing of US banks- overnight US treasury secretary Geithner stated that none of the 19 banks were at risk of insolvency and that the banks should repay the $25 billion owed to the government within 1 year. Yesterday the market was rattled with reports that Bank Of America may require as much as $34 billion in additional capital- however more recent feelers suggest that this may not be the case- we will see later. Any negative results hear should cause a surge back into dollar buying.

Aside from the euro weakness ahead of the ECB meeting- most of the movements are equity market driven. The increased confidence particularly in the banking sector is helping sterling gain and encouraging more investors to seek yield- again we are seeing strength in the AUD, ZAR and NZD to mirror this effect.


report by Phil McHugh, Corporate Foreign Exchange.

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