The December ECB meeting will be the key event for EUR this week with recent speeches by various Governing Council members suggesting that the ECB will pull no punches when it comes to boosting the outlook for inflation in the Eurozone.
CACIB economists expect a 10bp deposit rate cut and extension of QE by six months to March 2007. The Governing Council should also leave the door wide open for more easing measures from here.
When it comes to the FX markets reaction, investors have focused on the prospects for further cuts of the deposit rates. Recent media reports have suggested that the EBC may apply a two-tier deposit charge that could allow them to cut rates more aggressively so long as they could spare banks with structurally larger excess cash holding like deposit-taking retail banks.
With the markets already expecting a 15bp deposit rate cut, chances are that the ECB may struggle to exceed already dovish market expectations.
While we cannot exclude a test of this year’s lows ahead of the ECB, we think that EUR could squeeze higher in the aftermath of the meeting.
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