ECB: Poor risk/reward to pre-position for an outcome - TDS

Analysts at TDS see this ECB meeting precariously positioned around the nuance of what the Governing Council can agree on, and when, which makes for poor risk/reward to pre-position for an outcome.

Key Quotes

“Under our base case, we see the market mildly selling the EUR on the policy decision as the hawkish tail risk fails to materialise, with this pushing further into the prepared remarks, when Draghi downgrades inflation forecasts and cites EUR strength as the main reason.”

“But in that case, we would expect Draghi to be more balanced in the Q&A, which would likely set up for a squeeze higher from the lows in EURUSD.”

“Draghi’s two options in our view to prevent this and sustain a lower euro on the day are to either (1) inject the “unwarranted tightening” terminology in his discussion of the currency or (2) significantly reinforce the ECB’s sequencing of policy options to make clear that they have no intention of hiking the depo rate any time soon and help Euribors price out some tightening priced in for 2018/19. Otherwise, the center of gravity for EURUSD is higher if Draghi tries to be more balanced.”

“The EUR’s recent rise has seen European equities underperform and real rates decline significantly; we would expect a somewhat perverse market reaction where a dovish Draghi causes EUR↓ and drives rates↑.”