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Odds of an ECB Surprise?

17 Years ago | June 04, 2014 10/1/22, 12:00 AM

As I noted in our June newsletter, the focus to start the month is on the ECB meeting and to what extent monetary easing is already discounted in the markets. As we all know, markets move on surprises so it is worth taking some time to see what would be considered a surprise from the ECB. The price action over the past two weeks, where EURUSD has traded within a 1.3584-1.3688, lately narrowing to 1.3584-1.3650, suggests a market that is bearish but wary of a buy the rumor, sell the fact reaction.

What is Likely from the ECB?

This reads like a laundry list and any or all would not be a surprise. The more items included in the ECB’s monetary easing the more the market may take notice. What is for sure is that there will be rate cuts and most likely a targeted lending program (e.g. LTRO).

  • 25bp cut on the marginal lending facility to 0.50%
  • 15bp cut in the repo rate to 0.10%
  • 10-15 bp cut in the deposit rate to -0.10%/-0.15% (most are looking for -0.10%)
  • Injection of liquidity by ending sterilization of SMP
  • Targeted LTROs
  • Non-sovereign debt purchase program

What would be an ECB Surprise?

  • Anything less than a 10bp cut in the deposit rate that would take it into negative territory would be a surprise. Cuts in refinance and bank lending rates are also expected but the deposit rate cut is the key focus.
  • More aggressive cut than 10-15bps in the deposit rate
  • No targeted lending program
  • Quantitative easing – highly doubtful but would be a game changer

The bottom line is that there is not much scope for a surprise other than quantitative easing or a larger cut in the deposit rate (or no cut at all). Any other surprises would probably be on a minor variety but we cannot rule anything out.

This is a case where the reaction to news will probably be more important than the news itself since markets have been trading on an expected ECB meeting for the past month. What we can be sure of is that there will be volatility around the ECB meeting. For me, the question is whether a purge of weak short positions is needed before a run to a new low or whether the market can take out what has been an invisible hand in the 1.3580s without shaking out weak shorts. Much will depend on where stops are lying as that may dictate where the first reaction will be.

Looking at the broad picture, only above 1.3735-50 would be a game changer for me while 1.3650-70-88 stand ahead of it. On the downside, 1.3559-62 remains the next target with 1.3475 the key level while below 1.3650.

Jay Meisler, founder

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