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News-Flow Begins to Lift Market Sentiment

European equities are up for the second day in a row as the market tone appears to be shifting. The policy responses needed to support the financial markets are slowly coming in and have helped to stabilize the markets. Beginning with the SNB’s decision to fix the EUR/CHF rate at 1.20, the German Constitutional Court ruling, the passage of a new Italian fiscal package, an expected new jobs program from Obama and the potential for a policy response from the G7 shows the news-flow is now shifting in favor of higher yielding assets.

The BOE left both its interest rate and asset purchase facility unchanged today but rumors continue to float of the BOE implementing additional measures to ease UK monetary policy. However, one must note that UK gilt yields are already extremely low with the 10-year gilt yield trading at 2.33%. At this stage it’s unclear how much of an impact lower UK interest rates would impact the UK economy should the BOE implement another round of easing. The recent performance of the GBP/USD has been nothing short of ugly with the pair falling over 4% from its August high, though cable is up on the day following the BOE rate decision and it looks like the pair has made a triple bottom on the hourly chart. Support comes in at this week’s high of 1.6200 which is reinforced by the 38% retracement from the mid-August high. A break of today’s low of 1.5910 may have scope to the July low of 1.5780.

This afternoon is filled with unemployment and trade balance numbers from the US and Canada as well as speeches by Bernanke and President Obama but it will be the ECB press conference that drives the North American trading session. Expectations are for the ECB to lower its official inflation forecasts. What remains to be seen is just how dovish Trichet appears in his press conference later today. Trichet runs the risk of tipping his hat to the ECB backpedalling on its two previous interest rate increases earlier this year. With the EUR already coming under pressure from the European debt crisis, market players may be quick to sell the EUR should Trichet hint at the ECB reversing its previous tightening schedule. The EUR/USD has support at 1.3990 and a close below the long term trend line from May could have further technical implications for the EUR. Below here rests the July low of 1.3835 while resistance is found at 1.4280.

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By Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.