Yesterday’s decision by the German constitutional court to ratify the legality of the recent bailouts of peripheral European countries, along with the passing of the Italian austerity budget in a confidence vote in the senate, may well have staved off an imminent crisis, but it certainly hasn’t resolved it.

If anything it’s probably only bought some time for policymakers, but given the politically toxic backdrop starting to simmer amongst voters in Europe one has to ask the question, how politicians can impose a policy on populations who remain clearly unconvinced about the solutions being asked of or imposed upon them.

A solution can only succeed if politicians are able to carry their voters along with them, and to date it would appear that politicians have been unable to do that, if scenes in Italy, Greece and Spain are anything to go by, not to mention unease amongst German voters, where Angela Merkel has taken a beating in recent polls.

Today’s meeting of the European Central Bank could well give important clues as to whether the council has changed its one eyed approach regarding inflation, given the recent slowdown in economic growth in Europe. While rates are expected to be left as they are, Trichet’s comments at the end of August suggest that we could see a much more dovish tone in his press conference afterwards, which could see the euro start to slip back after yesterday’s recovery.

While some analysts appear to be ruling out an early rate cut it would be no surprise if he indicated the possibility of an easing of monetary policy in the next couple of months, especially as the likelihood of an improvement in the economic outlook appears unlikely given the current economic backdrop.

Before the ECB decision however we have the small matter of the Bank of England monthly meeting against a similar backdrop of slowing growth and calls for further monetary stimulus from a variety of sources.

Having kept rates at record lows for over 28 months it is unlikely that this will change, however given the recent decline in economic data, culminating with yesterday’s disappointing manufacturing and industrial production data, there has been speculation that the Bank could announce further QE today, with the Institute of Directors amongst others calling for more QE immediately.

Habitual dove Adam Posen has been consistent in his calls for further QE for quite some time now, and it appears that some on the committee are starting to lean in that direction, however it would need another four votes for that to happen and that seems unlikely given current levels of inflation in the economy, and the likelihood that those price pressures haven’t yet peaked.

Furthermore additional QE would drive the pound lower and imported inflation higher at a time when rising prices are the last thing the economy needs.

In the US yesterdays Beige Book showed that despite the recent poor economic data growth still remains in most Fed regions.

Weekly jobless claims are expected to remain above the 400k level at 409k, unchanged from last weeks number while the July trade balance is expected to remain above the -$50bn mark at -$51bn, down slightly from the -$53.1bn in June.

Later on Ben Bernanke is due to give a speech to the economics club in Minnesota where some expect him to give some clues as to what measures the Fed might discuss in their September meeting.

President Obama is also due to give an address on the economy to Congress outlining a $300bn jobs package of infrastructure spending and tax cuts for next year, by back loading the tax raising part of the package in later years.

EURUSD – as indicated yesterday the single currency was unable to close significantly below the key support levels located around the 1.4000 level. It would appear that our line in the sand for the trend line support from the 1.1880 lows in 2010, which comes on around 1.3975 and while this continues to hold caution with respect to pullbacks needs to be exercised. A break lower is required to target 1.3835 and the July lows.
The 200 week MA is also a key level at 1.4025 on a weekly close.
In the interim pullbacks should find resistance below the 100 day MA at 1.4360 which had until last week acted as support for the previous 2 weeks.

GBPUSD – a slightly better day for the pound yesterday, as it found some support at 1.5920/30 for the second day in a row.
The pound still looks oversold and as such a break above 1.6050 could well retarget a move back to the 200 day MA at 1.6120/30 which should act as resistance for any pullbacks.
A move back above 1.6120/30 delays the move towards 1.5780 and retargets the 1.6220 area.

EURGBP – the 55 day MA has so far capped the pullback in the single currency to 0.8820 area, as it continues to find steady bids in the low 0.8700’s. It still remains in a range with the top remaining around 0.8890 and the key support remaining at 0.8680/90 which is where the 200 day MA currently sits. This remains the key level on a daily close for a retest of May lows at 0.8610 and ultimately the trend line support at 0.8565 from the 2010 lows at 0.8065.
Despite yesterday’s sharp spike above 0.8825 the market failed to close above the 55 day MA, and this keeps the pressure on the downside.

USDJPY – twin peaks around the 77.60/70 area continue to cap the rise in the dollar here and as such keeps the pressure on for another test lower towards the solid support at 76.20/30.
Only a close above 77.60 shifts the focus towards a test of the 55 day MA at 78.20, and bigger resistance level at 79.50/60.
Any move below the key lows at 76.20/30 could well see further US dollar losses towards 74.50.