European share prices edged up while the single currency was steady today as markets waited to see if the European Central Bank and the US Federal Reserve will respond to fresh evidence of slowing global economic growth.
Investors are focused on the ECB's meeting tomorrow to see how the central bank's president Mario Draghi plans to make good on his promise to protect the euro. Few believe the Fed will announce fresh monetary stimulus at the end of its two-day meeting later today.
Those who expect Mr Draghi to live up to his promise in the face of repeated opposition from Germany's central bank are expected to sell the euro and European shares and drive up Spanish and Italian bond yields if the ECB does nothing.
However, any move still hangs in the balance as the German Bundesbank has staunchly resisted a bigger role for ECB that would let it buy more sovereign debt, which it believes flouts European law banning monetary financing of governments.
Nick Parsons, head of markets strategy in Europe for National Australia Bank in London, said the euro could fall a couple of US cents from current levels if Mr Draghi fails to act.
Mr Parsons said the single currency might fall back below $1.2130 against the dollar, though a firm response by the ECB could lift it above last week's peak of $1.2390.
"After that you'd really be looking at $1.2693, the high on the last trading day of June, but we'd really need to see monetary shock and awe to take us to those sorts of levels," he said.
The euro was flat today at $1.2315, coming under some pressure after Bundesbank President Jens Weidmann said in an internal interview that governments overestimated the ECB's capacities and placed too many demands on it.
Equity markets looked set for a similar rollercoaster ride tomorrow.
"Given the fact that we have now seen eight weeks in a row of positive returns on European equities, there is certainly a risk that we might see a retreat in the area of 5 per cent in the near term," said Gerhard Schwarz, head of equity strategy at Baader Bank.
If the ECB does not act, "then the question is how quickly we will get to a more meaningful crisis response, and I think that certainly the macro news flow is still disappointing, so this will come back to the centre stage again," he said.
Since Mr Draghi first made his comments of fresh support for the euro last Thursday, equity markets have enjoyed broad gains.
The STOXX 600 index of European companies has risen about 4.5 per cent, although it gave up some of these gains yesterday on scepticism about whether the ECB would deliver.
The FTSEurofirst 300 index of top European shares was slightly higher, up 0.25 per cent at 1,065.80 points, having posted a 4.1 per cent rise in July, the second-best monthly rise this year after strong gains in June.
US stock index futures rose on Wednesday after two straight sessions of declines ahead of the Fed's announcement.
In the debt markets, where yields on Spanish and Italian debt have plunged from near unsustainable levels since Draghi's comments, sentiment was improving strongly today.
Italian 10-year government bond yields were down 16 basis points at 5.92 per cent and equivalent Spanish yields were 7.5 bps lower at 6.7 per cent. The appetite for riskier debt pushed 10-year German government bond yields 5 basis points higher to 1.34 per cent.
Some fixed income analysts are looking for the ECB to either make clear what yield level on Spanish and Italian bonds they consider too high, or say they will come into the markets directly and buy debt to lower the yields.
"But if you get neither of those, I think there will be disappointment, and you could well see yields go up towards the highs of last week," Elisabeth Afseth, fixed income analyst at Investec said.
Reuters