ECB Preview: Draghi's hands are tied, last ditch efforts are the only hope

The September ECB's economic policy meeting is expected to bring little action and more dovish rhetoric from President Mario Draghi. No big changes are expected, although there's some speculation that the Central Bank could extend its bond-buying program for six months, from March to September 2017. The bond-buying program, which has been running for over a year already, will likely remain unchanged at €80 billion per month, whilst rates will likely remain unchanged at -0.4%.

There is, however,  a big issue markets seem to be ignoring at this point, and that is that the ECB has already deployed its full armor last March, and has so far accumulated around €1 trillion of local bonds, and eligible assets are getting closer to exhaustion.  At some point, not far in the future, the Central Bank will have not enough assets to buy, due to the self-imposed limits. And whilst Draghi has reaffirmed that the program "continues to proceed smoothly," fears are that the Central Bank will have to cut the deposit rate further from the current -40bps, and loosen those limits, and get into more risky bonds, to prevent the financial collapse of the Union.

In the meantime, growth is sluggish and inflation low. Europe grew by 0.3% in the second quarter of this 2016 according to the latest GDP release.  The EU economy even suffered a setback in July, mostly due to fears over the consequences of the Brexit. Inflation remains well below the 2% target, and the region is closer to deflation according to the latest official release, as consumer prices rose by 0.2% in August from a year earlier.

Draghi is between a rock and a hard place. He has been there before plenty of times, the only difference, this time, is that he has already burned most of its bullets and that the UK has decided to leave the Union, adding to the persistent economic slowdown of the EU. Beyond a dovish stance, and a sincere acknowledgment of the ongoing situation, Draghi has little to offer this time.

EUR/USD levels to watch

The EUR/USD pair has settled around 1.1245 ahead of the ECB announcement, with the common currency favored by dollar's broad weakness rather than speculation of whatever the ECB can do this Thursday. The upward potential is based on FED's diminishing chances of a rate hike, and not on hopes that Draghi will come to save the day.

In general, a dovish stance from the ECB's head puts pressure over the EUR, although in this particular case, the decline could be limited, mostly if US data keeps disappointing. Nevertheless, the immediate support comes at 1.1160, with a break below it probably resulting in a quick test of 1.1120, en route to 1.1080.

Above 1.1275 chances are of an upward extension, with the immediate short-term resistances at 1.1330 and 1.1366, a level that can be reached with an aggressive stance from the ECB.