ECB Meeting: Broader range for the EURGBP, CHF to follow EUR

A day ahead of the European Central Bank rate decision, the EUR/GBP pair is trading 0.17% higher around 0.7060 levels. The ECB President dropped a hint of more action in December at the October meeting. The market responded by selling the EUR aggressively. Consequently, the shared currency is oversold on technical charts against the US dollar.

Some of the actions that ECB may take tomorrow
Possible action	Probability
Could extend the maturity of its QE program	Currently scheduled to end in Sep 2016, Hard to sell
Increase the size of the QE	Hard to Sell, but bond markets appear to have price-in the possibility of a this move.
Diversify the composition	Consider buying rebundled loans at risk of non-payment, Implement a two tier charge on banks that park their cash at the ECB
Lower interest rates further	Deposit rate cut likely. German 2-year yield trade around -0.40% Refi rate cuts unlikely

Bloomberg survey says

80% of market participants expect them to extend the QE program past Sep. 2016, around 65% expect them to increase the amount of purchases, and about half expect them to broaden the range of assets that they buy.

The participants expect the ECB to cut the deposit facility rate to -0.30%, with several economists looking for -0.40%. No change is forecast for the Refi rate or marginal facility.

What is priced-in?

The German yields hit record lows multiple times in last one month or so. The EONIA futures point to a drop in the deposit rate.
Speculators are heavily short on the EUR. The net short positions are at the largest since the week of May 12, 2015.
Overall, the deposit rate and a minor tweak in the QE program appears to have priced-in and this presents a risk of a quick fire unwinding of the EUR shorts (if deposit rate is cut as expected) during the 45 minute gap between the rate decision and Draghi’s Press conference.

EUR/GBP: Broader Range – 0.7232-0.6859

The EUR/GBP pair could drop to a low of 0.6859 (May 2007 high) in the next couple of days if the ECB comes out more aggressive than expected.

On the other hand, if the ECB falls short of expectations could see the pair jump to 0.7232 (Trendline resistance: June 2010 low-July 2012 low).

Meanwhile, if the ECB meets market expectations – deposit rate cut, minor tweak in QE program – could see the pair test 0.7139 (161.8% of Dec 2008 high-June 2009 low-Oct 2009 low).

On the daily chart, the EUR/GBP pair recovered after the RSI showed bullish divergence on Nov 18th. The RSI has moved above 50 levels on the 4-hr chart, which shifts the risk in favour of a further rise in the EUR/GBP pair.

CHF to follow EUR

CHF is likely to follow the EUR after the rate decision and Draghi’s presser. The inverse correlation between EUR/USD and USD/CHF (direct correlation between EUR and CHF) has strengthened significantly from mid-October as markets believe the SNB would follow the QE.

So more action from the ECB tomorrow could trigger expectations of retaliation from the SNB and vice versa.

The EUR could spike across the board if the ECB falls short of the market expectations. If the ECB comes out more aggressive than expected, the EUR/CAD could slump to monthly 50-MA at 1.3840.

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