This Thursday ECBs governing council will signal a willingness to ease further. However, there are numerous agreements for a proactive 10bp to 20bp deposit rate cut. We have still expected the first cut of 10bp in September. ECB Chief Economist Philip Lane comment that ECB needs to move "proactively" to an inflation rate that was too low. Yet, there is a growing resistance to negative interest rates despite weak economic data. Banks, companies and private households are hurting with long-term damage unknown. Generally, the ECB has acted in reaction to a crisis. But with an unemployment rate of 7.7% Europe is far from crisis levels signaling to financial markets that extreme policy is necessary would be counterproductive. For Thursday we are likely to also hear of the ECB plan to introduce tiered inters rates, so entities that are affected can be micromanaged. Official central bank rates will likely only apply to a portion of a deposit and select entities. Limits to the usefulness of rate cuts, the assumption has grown that the ECB might restart bond purchases. Although this strategy is questionable without an additional deterioration in the economic situation. Also, ECB will be hesitant due to volume limit rules which can’t breach 33% of the outstanding volume of an individual bond. Regardless, the market is expecting ECB dovish skew by selling Euro across the board. EURUSD clear 1.1200 support, with bearish extension likely to reach 1.1107(2019 low).
By
Peter Rosenstreich
