X markets and risky assets paused ahead of today's BoE and ECB rate decision.
The EURUSD has been confined to a relatively tight range between 1.4360 and 1.4450, while the GBPUSD to1.6900 to 1.7015. We are in line with market expectations that both central banks will hold rates steady. However, there is significant disagreement among pundits in regards to the BoE QE program. Analysts interviewed by Bloomberg has 23 of 44 expecting an extension of asset purchases. We are in the corner that the BoE will opt for a pause (not a complete end) to assess the effects the program has had on the economy. While a full stop in QE would have been significantly GBP supportive and pause should also be slightly sterling positive. However the most difficult market's reaction to predict what would be if the MPC decision to take the middle path and chooses a small extension. In regard to the ECB, the accompanying statement will probably not be radically changed from July's statement. Although due to respectable economic data coming from the Eurozone we could see a slightly more optimistic tone, which will be EUR positive. After the smoke from the central bank decisions clear the markets, attention will quickly turn to tomorrow's NFP. Yesterday's ADP release was less than confident and now points to a lower than consensus NFP. Much of the current weakness in the US labor market has already been priced in, but leading indicators such as Monster Online Jobs Index illustrated that the rate of change might not be slowing as fast as markets expect. There is still a considerable buzz of a USD rally and double top in risk appetite. Should labor highlight that the recovery is not entrenched we could expect the liquidation of USD short positions.
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