ECB to go negative

The Beige Book released last night showed that all 12 regions in the US are seeing a moderate expansion in the economy with the highlights from Asia being the HSBC service PMI data from China that came in weaker at 50.7 from the April reading of 49.5. This along with the Australian trade balance falling into deficit of 122 million, which had been forecast to show a surplus of 510 million, saw AUD reverse gains back towards the 0.9250 level.

Today is all about the ECB and what action they will take to fend off the imminent threat of deflation with market expectations raised to the maximum, leaving plenty of room for a huge disappointment. We have seen this time and time again from the ECB and market positioning is showing extreme shorts in the single currency. Below are the potential scenarios:

1. No rate cut

2. Re-financing rate plus deposit rate cuts of 10-15 basis points

3. Re-financing plus deposit rate cuts of a larger 20-25 basis points

4. Option 2 or 3 plus liquidity measures – MRO extension to 2016 and/or SMP sterilisation suspension

5. The above plus FLS/LTRO for SMEs with the press conference to hint at all out QE being imminent

6. The above plus an outline of framework for the implementation of QE programme

Number 4 is what I believe the market has priced in which I think will see us move gradually down to 1.33 with number 1 outcome taking us back to 1.40.

EUR/USD

Supports 1.3520-1.3480-1.3420 | Resistance 1.3650-1.3790-1.3840

USD/JPY

Supports 102.40-102.10-101.80 | Resistance 102.80-103.10-104.00

GBP/USD

Supports 1.6705-1.6670-1.6600 | Resistance 1.6780-1.6820-1.6880