(25 JANUARY 2018)DAILY MARKET BRIEF 1:Draghi to keep its ammo for March meeting

With all the noise created by Trump’s visit in Davos, the first ECB meeting of the year will almost go unnoticed. The single currency printed another multi-year high earlier this morning as EUR/USD reached 1.2459 before consolidating at around 1.2415. In spite of the apparent calm prevailing in the FX market, the option market tells a different story.

Indeed, the 1-week implied volatility on EUR/USD surged to 10.73% compared to around 7% a week ago. Looking at the 25-delta risk reversal, we notice that calls are slightly more expensive than puts - implied volatility difference between calls and puts stands at 0.435% - which suggests that the market is rather bullish EUR/USD.

Even though there is nothing major to expect from today’s ECB meeting as rates and the rate of asset purchase will be most likely maintained at current levels, investors are looking to get further information regarding the monetary policy outlook. In other words, many believe that it is time to adjust the central bank’s forward guidance against the backdrop of accelerating economic growth and improving inflationary outlook.

We believe the ECB is in no hurry to update its monetary policy, especially against the backdrop of surging single currency. Mario Draghi will set aside any big announcement for the March meeting. The ECB President may however give some positive comments about the EU economy and/or avoid complaining about the EUR strength. So an upside reaction in EUR crosses cannot be exclude.

By Arnaud Masset