Yesterday’s move by the European Central Bank to announce a number of additional liquidity measures, including the purchase of €40bn worth of covered bonds, as well as a 12 month long term refinancing operation (LTRO) in October and a 13 month LTRO in December could well have bought European governments extra time to deal with the banking crisis that is engulfing the region.

By giving some degree of long term certainty on liquidity to the banking sector policymakers get time to arrive at a recapitalisation plan, starting with Dexia at the weekend, as Greece heads closer to a default. Ratings agency Standard and Poor\'s also lowered the rating on Dexia in lieu of this weekend\'s events, but did say it could raise them again depending on how the restructuring played out.

There was disappointment however at the stubborn refusal of the ECB to cut rates, but the door was left open to a cut next month when Trichet pointedly omitted to assert that monetary policy remained “accommodative”, especially given that the rate decision was arrived at by consensus, and not by unanimity.

The refusal to lower rates was especially puzzling given that economic data in Germany continues to fall off a cliff with factory orders for August sliding 1.4%, and today’s release of industrial production data for August also expected to slip by 2%, as Europe’s largest economy continues to exhibit signs of grinding to a halt.

In the UK the Bank of England caught markets on the hop by restarting their QE program, adding £75bn to the economy in the next four months, casting aside fears about inflation which is once again set to rise again today with producer input prices for September set to push back above 17% once more.

With CPI also set to rise to near the 5% level next week the risk is that by sending the pound lower the bank will make the inflation problem much stickier than it needs to be, especially given that the problems in the UK economy now are more to do with events in Europe as well as indebted households; it is hard to see how the extra money will help.

The main event of the day is the US employment report for September with expectations that the US economy will add some extra jobs after August’s disappointing number came in at zero jobs. The consensus expectation is for a gain of 50k jobs while the unemployment rate is set to remain unchanged at 9.1%.

The improvement in US data this week has encouraged investors that the US economy may be starting to improve, however some of the employment components in this week’s ISM numbers have told a different story. We shall see later.

EURUSD – yesterday’s pullback and unexpected close above 1.3410 shifts the balance of probabilities back toward a move towards 1.3500 and even higher towards 1.3700 the recent range highs.
Even allowing for this unexpected development, the longer term objective remains 1.3050 which is the 61.8% retracement level of the 1.1880/1.4940 up move; however we could well see a pause now given the sharpness of the recent declines.
Longer term the objective remains for a move towards 1.3000 and this years low at 1.2870.

GBPUSD – yesterday’s sharp drop to 1.5260 fell short of the 1.5190 objective and didn’t last very long in any case. The resilience of the pound has seen the cable consolidate once more above 1.5400. To push on further it needs to push beyond the 1.5520 area 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 – we got the move towards the 0.8700 level and even beyond after the surprise moves by central banks yesterday. The rebound could extend as far as the down trend line at 0.8760 from the recent highs at 0.9085 without undoing the downward momentum.
To target a move lower the single currency needs to get back below the 0.8650 area which had been acting as resistance throughout the first part of this week.

USDJPY – it as you were in this pair for now but 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.