Despite market optimism that some form of bank recapitalisation package is in the works, the potential for disappointment remains high.

This is in spite of, German chancellor Angela Merkel’s public support for the measure, probably because agreeing with a course of action is one thing, but delivering it does tend to present problems to Europe’s leaders.

As if to underline the point Moody’s followed up its sovereign downgrade of Italy by across the board downgrades of Italy’s banks.

In any case attention today is focussed on two central bank decisions that have the potential for significant disappointment if they don’t deliver on market expectations.

Starting with the Bank of England there is some expectation that the bank could be set to embark on a second round of asset purchases, in an attempt to stimulate the UK economy. Yesterday’s disappointing downward revision of Q2 GDP will have done nothing to change that perception, however the much better than expected services PMI figure for September will probably stay the Bank’s hand for now, and policy will probably left as is.

Furthermore the likelihood of another four policymakers joining Adam Posen in the doves camp remains a stretch in the historically conservative world of central banking. We could well see maybe one or two join Posen for his call for more QE, but we’ll only know how much the balance of power has shifted when the minutes are published in two weeks time.

An additional factor that could sway the committee is events in Europe and it might be wise to hold fire on further QE in the event that Europe deteriorates further, or even co-ordinate a policy response alongside the ECB next month, at around the same time as the Cannes meeting of the G20.

Forty five minutes later and the ECB will publish their own rate decision with siren calls for immediate rate cuts ringing in their ears with the number of analysts calling for a 50bps rate cut rising by the day. It seems likely that these analysts could well end up being disappointed.

Despite the folly of the ECB in raising interest rates twice this year, when it was apparent to almost everyone it would exacerbate the debt situation in Europe, it remains unlikely that Trichet, in his last press conference as ECB head will acquiesce to the markets expectations.

It is more likely that the ECB will extend the unlimited liquidity measures to banks while in his press conference he could well give clues about the prospects of a rate cut in the November meeting, which will be Mario Draghi’s first as ECB president.

At the same time US weekly jobless claims are expected out and markets will be hoping that last week’s 391k number wasn’t a freak one-off and that the downward path is sustained. Expectations are for a rise back above 400k, with a figure of 410k, though with non-farm payrolls tomorrow yesterday’s better than expected ADP numbers for September has raised expectations surrounding tomorrow’s data release.

EURUSD – despite yesterday’s consolidation and Monday’s nine month low at 1.3150 the risk remains for a move back towards the 1.3410 area which was the 50% retracement level of the entire up move from 1.1880/1.4940.
The longer term objective remains 1.3050 which is the 61.8% retracement level of the same move, however we could well see a pause now given the sharpness of the recent declines.
Only a close back above 1.3400 would retarget a pullback towards 1.3500 and even 1.3700, the recent range highs.
Longer term the objective remains for a move towards 1.3000 and this years low at 1.2870.

GBPUSD – Monday’s failure to take out the previous lows at 1.5330 has seen the cable consolidate between 1.5400 and 1.5500, but we need to get back above 1.5520 to stabilise and target a retest of the resistance around the 1.5700 level.
In the longer term a move towards 1.5190 remains the probable longer term outcome. The 1.5190 level is the 61.8% retracement of the entire up move from the 2010 lows at 1.4230 to 1.6745.

EURGBP – the 0.8650 level continues to limit the upside after Monday’s rebound off double support at 0.8530.
While above 0.8575 the risk for further range trading remain delays the prospect of a move towards 0.8455 for now We could well see a further rally back towards 0.8700 in the next few hours especially if the ECB holds rates today.
Support should now come in around the 0.8580 area.

USDJPY – the bias remains for further gains on a break of 77.20 level towards 77.80, while above 76.00/20 area. Any move below the key lows at 76.00/30 could well see further US dollar losses towards 74.50.
Low US yields continue to restrain the upside while fear about intervention limits the downside.


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