ECB continue to add liquidity

Euro Research Report

• ECB continue to add liquidity

• Tomorrows ECB meeting will determine near term direction

• Gbp/Eur will continue to be driven by monetary policy divergence

Sterling Euro (GBPEUR) FX Technical Analysis

Pressure continues to mount on the ECB, on whether they need to implement a new form of stimulus like Quantitative Easing (purchasing government bonds). Monetary & fiscal stimulus such as Asset Backed securities and the long term refinancing operation (LTRO) have so far proven insufficient to stimulate growth or inflation. There has been very little demand for loans for investments with business confidence at an all-time low. This week Eurozone inflation data for September underwhelmed at 0.3 percent, down from 0.4 percent in August. Inflation is now at a 5 year low and continues to stay well below the European Central Bank's target of 2 percent. Manufacturing and industrial production continue to slow and this will only have been exacerbated by the strains between Russia and Ukraine after sanctions were imposed. Now we are facing a new dilemma as the ‘core economies’ that once held up the Eurozone through the crisis are now faltering. Germany have released a run of disappointing figures in recent weeks as business confidence fell and unemployment unexpectedly increased in September suggesting that the labour market is beginning to weaken after a contraction in output last quarter, compounding fears that the Eurozone’s largest economy is now stagnating. Italy, another core economy has already suffered three recessions since 2008 despite low interest rates and abundant bank-lending measures which has increased the need for the ECB to do more in order to bolster price stability. President Draghi has stated in the past that the ECB “stand ready to adjust our policy stance further should it become necessary”. Bringing forward several investments banks forecasts for the potential timing of QE. So will this be the month? We will find out tomorrow when the ECB deliver their latest assessment after their policy setting meeting. In contrast, with the uncertainty surrounding the Scottish referendum now a thing of the past. The UK economy continues to outperform as seen with this month’s release of GDP figures which once again ticked higher for this quarter to .9%. Bank of England Governor Carney signalled that the benchmark rate is likely to rise in early 2015, he said the rate at which wages rise over coming months will be key to the exact timing of the first move, and repeated his assurance that a rise in the benchmark rate will be "gradual and limited” however this divergence in monetary policy has propelled GBP/EUR to 2 years highs and should drive GBP/EUR higher over the coming months.

For EUR Buyers

We are at the 2 year highs so it would be folly not to at least reduce any near term exposure close to current levels. However it is worth noting that we are once more at the top of the channel which has been in place for over a year so a period of consolidation would not be a surprise. A break back below 1.2700 would suggest a move back to 1.2500.

For EUR Sellers

As the top of the channel is now approaching if you haven't covered your exposure it may be worth waiting to see if this proves to be a temporary top. Leave protection above 1.2900 and pray!