MARKET LOOKS FOR DIRECTION AFTER DRAB ECB

As anticipated, GBP/EUR took a sound thrashing yesterday as traders positioned themselves ahead of the behemoth event of the monthly European Central Bank meeting.  The juicy prospect of a ludicrously ever hawkish Jean-Claude Trichet, President of the Bank, once again continuing to aggressively use European Monetary policy as a tool engineered more toward inflation rather than deflation protection was simply too tempting for traders beginning to get a little dubious over Sterling’s recent hyperextension against the single currency.  Funds thus flocked to the Euro in the hope of a steaming market rally and a sound Eurozone interest rate profile for the medium and long term.

However, as also anticipated, much of the hype was in vain.  EUR/USD and EUR/GBP bulls were put into retreat yesterday afternoon over possibly one of the most drab and ambivalent ECB press conferences ever.  Instead of providing some power for classic risk-aversion trades, riding on the back of a decent outlook for Europe going into the end of this year and next, the Eurocrats decided to pitch markets with a meandering take on wavering economic conditions, stressing continued downside pressures.  This, in conjunction with no commitment to further quantitative easing or rate drops, both of which would have also dropped the Euro like a stone, instead left most currency pairs favouring no man’s land with a leaning toward the Dollar.

The above, which saw a EUR/USD reversal to break down through 1.40 as New York trading got into full swing, was also aided by a worse than expected Non-Farm Payrolls figure from the US.  The figure, closely watched by investors as an indication of global growth reflected in the US jobs market, was by no means disastrous (failing to bust the dreaded -500k week on week mark) but was enough to rally some risk-aversion, benefiting the Dollar.

Today should look for a continuation of market ambivalence.  EUR/USD currently looks steady at 1.40, with US economic risks propping up the EUR side and a dovish ECB propping up the Dollar side.  GBP/USD and GBP/EUR are also both stagnant and can be expected to trade flat for the day at 1.64 and 1.17 respectively.  Expect UK Services PMI, out at 930GMT to potentially send both pairs on the down for the day though with an afternoon recovery.