European markets managed to hold up fairly well yesterday, despite a weak start in the wake of the vote in the UK parliament that saw the latest Brexit deal go on pause. With the EU expected to sign off on a Brexit extension later this week, markets shook off their early nerves with the DAX hitting its highest levels in over a year.

US markets, on the other hand appear to be treading water, held back by some disappointing numbers from big hitters like Caterpillar and Boeing.

With the Brexit process now on pause until the EU decide what length of extension to offer the UK attention now turns to today’s ECB rate meeting, and President Mario Draghi’s last as President.

The resilience of European markets has been all the more surprising given that a lot of recent economic data has been anything but resilient. The sclerotic nature of the growth story in Europe is starting to fuel concerns that the weakness in the manufacturing sector could start to seep into the services side of the economy.

At its last meeting the European Central Bank moved to try and address this by reinstating its asset purchase program to the tune of €20bn a month, as well cutting the deposit rate to -0.5%. The bank also lowered its inflation and growth forecasts. If anything, the ECB under-delivered on market expectations in September, and it soon became apparent why as a series of dissenting voices followed the decision, and press conference.

These disagreements burst out into plain sight a few weeks later as German ECB board member Sabine Lautenschlaeger suddenly announced that she would be leaving her post at the end of this month, following in the footsteps of previous Bundesbank members who have departed early in the last ten years due to disagreements over monetary policy.

It is becoming quite clear that there are growing tensions within the governing council over the direction of monetary policy, and with the departure of ECB President Mario Draghi, also at the end of this month, these tensions are only likely to increase when Christine Lagarde takes over on the 1st November.

These disagreements are expected to intensify if today’s latest flash PMI numbers for October from Germany and France show no signs of improving, ahead of today’s ECB rate meeting, and Mario Draghi’s final press conference as ECB President.

The manufacturing numbers are expected to remain weak with Germany expected to remain close to ten-year lows of 41.7, with a 42 reading, while services are only expected to improve modestly from 51.4 to 52.  French manufacturing is expected to stagnate at 50, with services expected to improve to 51.6.

The best judge of how well a CEO has done their job is whether they leave the company in a better position than when they took over. If you applied that same standard to Mario Draghi and his tenure at the European Central Bank then you would have to say that his tenure has been a success.

It certainly hasn’t been an easy ride and there is no question that some rules have been bent quite significantly in the last eight years in order to “preserve the euro”, and potentially preventing a catastrophic crisis. However, while Draghi can certainly be described as the man who saved the euro, it may be a little premature to perform a victory lap, as he did earlier this month, when he made just such a claim.

This meeting may be Draghi’s swansong, and he certainly leaves the euro in a much more stable position than he found it, but the European economy still remains extremely vulnerable. It could also be argued that the ECB is already at the limits of its mandate, and in the absence of any sort of fiscal reform, a point he will once again make loud and clear to EU leaders, there is little in the way of a bazooka left if another crisis were to strike.

With interest rates already at record lows and deep in negative territory, all the ECB has done is reveal how fragile and brittle the European banking system is, with some now saying that the medicine is killing the patient, and that the bank is making things even worse.

Against this backdrop and with divisions already breaking out into the open on the governing council, Christine Lagarde will need more than a sticking plaster to paper over the cracks that Draghi has left behind.

EURUSD – the current pullback appears to be finding support just above the 1.1100 area. Key resistance remains just below the 1.1200 area and 200-day MA. A break below the 1.1100 area opens up the prospect of a test of trend line support from the lows this month comes in at the 1.1060 area, and below that at 1.0920.

GBPUSD – the slide back from the 1.3020 area found support at the 1.2840 area yesterday. Only a move below 1.2840 opens the prospect of a move towards the 1.2670 area. While above the 1.2840 level the prospect of a return to recent highs, as well as the 1.3200 area is a possibility.

EURGBP – rallies off the 0.8570 area appear to be finding resistance at the 0.8670 area, though we could well spill up to the 0.8715/20 level on any short squeeze. A break below the 0.8570 level has the potential to open up a move towards the 0.8410 area and the lows this year.

USDJPY – the 200-day MA and the 109.20/30 area appears to be capping gains for now. Support comes in at the 107.50 area, as well as the lows this month at 106.50.

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