What today's ECB meeting means for FX markets

The following article is based on research by Marshall Gittler, Head of Investment Research for FXPRIMUS.


FXPRIMUS Indicators and events for Thursday, March 10th

Economic indicators March 10

The main event today is of course the ECB meeting. I wrote an extensive piece (available in the Special Reports section of the FXPRIMUS  website) that I presented as a webinar (also available on the web). To sum up what I said there:

ECB President Draghi hinted at their last meeting in January they would increase their market assistance in March. Having said that, the ECB will have to take some steps todaybecause of the role that confidence plays in the markets. They have to appear active and in control even if they’re not.

The question then isn’t whether they’ll do anything. The question is what they’re likely to do and more importantly whether it will be enough to impress the market.

For example, they increased their stimulus in December, but Draghi had built expectations up so high that the small increase was a disappointment and EUR/USD jumped 4 cents in one day!

The key point is that because of that mistake, they know that this time they’ll have to do something really really big. A second disappointment after such strong suggestions would probably send the euro up sharply and stock markets down sharply. And they can’t risk that.

What can they do? They need to make a big impression on the market. Just changing one thing probably wouldn’t be enough. That’s why I expect them to reveal several new measures, including:

  • A further cut in the deposit rate. They’ve lowered it by 10 bps increments each time, maybe they’ll try 15 bps this time.
  • The introduction of a tiered deposit rate, like in Japan. That will be necessary to prevent the negative interest rates from pinching bank profits.
  • Raising the monthly bond purchases.
  • Extending the minimum duration of the bond purchases.
  • More miscellaneous measures.

The Euribor contracts are forecasting approximately 15 bps of further easing. That would imply perhaps a 10 bps cut at Thursday’s meeting and a 50-50 chance of another such cut over the next year. My guess is that they will have to exceed this in order to surprise the market.

Marshall Gittler Mar10

The issue for the FX market is not whether these measures will be effective in boosting economic activity and raising inflation, but rather whether they’re enough to boost market confidence. I think these measures would demonstrate to the market that the ECB is seriously worried about the downside risks to inflation and to the economy and is willing to take, as Mr. Draghi said on another subject, “whatever steps are necessary” to fight these risks. That should probably boost Eurozone stocks and weaken the euro, as happened when they first cut rates into negative territory.

That’s basically it for today’s activity. After that, the only major indicators out are from Canada and New Zealand, and both will be totally overshadowed by the previous day’s central bank meetings in those two countries.

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