All eyes will be on today’s ECB policy meeting, with the central bank widely expected to cut interest rates for the second consecutive month. Our forecasts show a cut of 0.25% but we would not rule out the possibility of a more aggressive move. Meanwhile, the post meeting press conference will be watched carefully as markets look for signs of a softening in tone from the central bank with regards to taking an increased role in the region’s sovereign debt crisis. Any disappointment in terms of what the ECB delivers could weigh heavily on the euro. Meanwhile, a two day summit of EU leaders gets underway later today, again a critical event for the euro. French and German officials said yesterday they are confident that several European Union nations, in addition to the 17 members of the euro zone, will sign up for greater central supervision of their national budgets, even if they have little optimism of rallying all 27 EU countries. The euro is holding up well versus the dollar ahead of the day’s events, with talk of preparations for a break up of the single currency in the Wall Street Journal appearing to have little real impact.

The Bank of England also makes a policy announcement today. We expect no policy changes before year end but the likelihood is that further quantitative easing (QE) will be introduced before too long. Data released in the UK yesterday showed that industrial production fell sharply in October, with manufacturing output slowing to its weakest level since January 2010. Output was down 0.7% on the month, leaving it up just 0.3% in year-on-year terms. Sterling saw one month highs versus the euro yesterday with markets on edge ahead of today’s key events and some evidence of safe haven flows. Versus the dollar, the GBP also saw gains despite the weak manufacturing data.