Danske Research Team
Danske Bank A/S
We have changed our view and now expect the ECB to cut the deposit rate by 20bp (previously 10bp) accompanied by a two-tier deposit rate system.
Our changed view reflects that none of the ECB members have argued against the aggressive pricing of more than a 10bp cut together with this week's Reuters' article suggesting the ECB is considering a larger deposit rate cut.
We still expect the ECB to introduce its old forward guidance, stating that policy rates could go lower, but we do not believe the ECB will actually have to cut further. Instead, we see this as the end of the easing cycle.
We also look for the ECB to expand QE purchases to EUR75bn per month and believe it will extend the purchases until December 2016. The actual ending point should still be dependent on a sustainable adjustment in the inflation path.
A lot is already priced in fixed income markets, implying an initial bullish steepening of the curve led by the short end should be only limited. Over time, the curve should steepen from the long end in a usual end-of-easing move.
We have lowered our EUR/USD forecasts given the prospect for a more aggressive ECB: we now look for 1.02 in 1M (previously 1.04), 1.02 in 3M (1.06), 1.06 in 6M (1.12), and 1.16 in 12M (1.20). That is, a sharper dip is seen in the cross near term but we still forecast a rebound in 6-12M.
Our changed view reflects that none of the ECB members have argued against the aggressive pricing of more than a 10bp cut together with this week's Reuters' article suggesting the ECB is considering a larger deposit rate cut.
We still expect the ECB to introduce its old forward guidance, stating that policy rates could go lower, but we do not believe the ECB will actually have to cut further. Instead, we see this as the end of the easing cycle.
We also look for the ECB to expand QE purchases to EUR75bn per month and believe it will extend the purchases until December 2016. The actual ending point should still be dependent on a sustainable adjustment in the inflation path.
A lot is already priced in fixed income markets, implying an initial bullish steepening of the curve led by the short end should be only limited. Over time, the curve should steepen from the long end in a usual end-of-easing move.
We have lowered our EUR/USD forecasts given the prospect for a more aggressive ECB: we now look for 1.02 in 1M (previously 1.04), 1.02 in 3M (1.06), 1.06 in 6M (1.12), and 1.16 in 12M (1.20). That is, a sharper dip is seen in the cross near term but we still forecast a rebound in 6-12M.
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