ECB: Market have priced in too aggressively

According to analysts from Danske Bank, markets have priced in too aggressively the potential changes mentioned in the ECB minutes.

Key Quotes:

“Due to the strong economic data, the return of the reflation theme and a couple of hawkish comments from the ECB, we have seen a repricing of the front end of the EUR curve since December. Markets now price in the first 10bp ECB hike in early 2019 and are pricing in that the deposit rate will reach zero by the end of 2019. This is more aggressive than our own ECB forecast and we strongly doubt the ECB will be able to hike according to expectations.”

“We expect the first ECB hike in Q2 19. Although the QE programme officially runs until September, the ECB has communicated that it does not want to make a sudden stop and we believe we are likely to see some sort of tapering in Q4 18. As the ECB forward guidance says rates will stay at present levels ‘well past’ the QE horizon, it simply seems to us too early for the ECB to hike in Q1 19.

“We continue to expect a modestly steeper EUR yield curve for the 2Y10Y in 2018. The ECB maintains a tight grip on the short end of the curve. However, this is not the case for the 10Y segment of the curve, which we expect US yields and a smaller QE programme to push higher.”

“We do not buy into the ‘reflation’ story and hence still deem it too early for EUR/USD to make the next level shift higher. For this to happen in Q1 would require a cyclical outperformance of the eurozone versus the US and/or upside wage/inflation surprises with neither being our base case.”

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