Will the ECB deliver today?

The ECB meeting will be the main event today and we expect the ECB to ease policy. On Monday, ECB president Mario Draghi told the European parliament that the current rate of inflation (0.8%) was “way below” the ECB’s target and added that “we know that the longer inflation stays at the current level, the higher will be the risk that it will not go back to 2% in any reasonable time...in other words, the longer will be the risk that inflation expectations could be disanchored – and we don’t want that”. This is a clear signal that the ECB will act again and we believe it will start today by stopping the sterilisation of the SMP programme which, viewed in isolation, should be slightly EUR/USD negative.
However, as some ECB easing already is priced in, the downside potential in EUR/USD from a stop of sterilisation could be limited unless Draghi’s comments at the subsequent press conference are very dovish. If the ECB, on the other hand, does not deliver something, it will be a huge disappointment, and thus a risk of EUR upside.

In our view, a stop to the sterilisation of the SMP programme is not enough to fight deflation risks in the euro area and thus we believe it will also cut the deposit rate to negative during Q2. We project that further ECB easing combined with a continuation of the current tapering path by the Fed eventually will lead to a decline in EUR/USD towards 1.26 in 12 months’ time. In the near term, however, EUR/USD downside potential might be limited due to positioning, where speculative accounts already are relatively stretched long USD according to the latest IMM data and due to the current pricing in European money markets where some ECB easing already has been priced in.

We have updated our short-term financial models this morning (see page 2). In particular, NOK currently stands out with both EUR/NOK and USD/NOK in oversold territory and NOK/SEK being overbought. While we remain fairly bullish on NOK over the medium to longer term, our models suggests, that the recent NOK appreciation might be a bit overdone. In addition, EUR/NOK is not far from our 3M forecast of 8.20 and thus we think it might be worth considering some short term profit-taking in long NOK positions.