German court decides on ESM

• USD hit hard on improving sentiment pre-ESM

• Dutch election likely to yield left leaning coalition

• UK trade data improves amid global slowdown

• All eyes on Fed decision tomorrow evening.

To coin a phrase, the USD was beaten like it owed money yesterday, with both EURUSD and GBPUSD hitting fresh 4 month highs in the afternoon session. The gains were founded on the back of the belief that the German constitutional court will do nothing to scare the horses when it votes on the legality of the ESM at 9am BST this morning. Any interruption would obviously prove to be a massive negative to European, and world, sentiment. The value of the ESM currently sits at a rather paltry EUR440bn which would not be enough to cover Spain’s requirements let alone Italy if it also needed aid.

The decision will not be one that simply says the ESM is legal or indeed not. The requirement of further oversight from the Bundestag is the most likely outcome, with bailouts becoming longer to obtain once requested as a result. There is also the possibility that further bailouts could need a referendum – yet another time sensitive measure. In any case the possibility of them throwing out the ESM is really very low.

There has been very little new news from the Netherlands over the past 24hrs and so we continue yesterday’s guidance on the prospects of the election. Results are not anticipated until the Asian session overnight and a continuation of the current stance to bailouts is expected from a winning coalition i.e. support for bailouts but only with a hefty dollop of austerity attached.

UK trade data was slightly better than expected following the poor numbers in June as a result of the Jubilee manufacturing and industrial production slowdown. Exports to non-EU countries hit a record and sustaining this will be the key with the Eurozone likely to remain in recession through the next three quarters. This all suggests that Q3 GDP will be more strongly positive than most had previously suggested and that the trade data will act favourably having previously being a bit of a horror show. The rebalancing of the pound in recent weeks at current levels won’t have hurt things either.

The pound was little moved on Vince Cable’s plans to invest money in competitive export sectors.

Away from Europe, US trade data fell back in July it seems completing a picture of slowing global trade through Q2. This will only have heightened expectations that the Fed will do something at their meeting tomorrow night. Whether it is balance sheet expansion (dollar negative) or simple rate guidance extension (dollar positive) the market is hopped up on the belief that it will get some more money to play with; if Bernanke head-fakes then the crash could be a spectacular one. The Fed decide at 17.30 tomorrow with a speech by Ben Bernanke due afterwards.

Data today may got lost in the mire and mist from Europe, but UK unemployment is due at 09.30 and Italian industrial production at 09.00 following the poor GDP numbers on Monday.

Have a good day.

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