Euro Firm Around $1.10; Market Frets ECB Disappointment
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Despite widespread expectations of European Central Bank easing at this week's meeting, the euro maintained a firm tone around $1.1000 Wednesday.
The market fretted a repeat of the December meeting, where the euro popped over four big figures higher when the ECB did not deliver what global investors wanted, traders explained.
Current expectations are that the ECB will announce a deposit rate cut of between 10 and 20 basis points and expand the amount of asset purchase by E10 billion at least and potentially also extend the asset purchase program by another six months.
There has also been talk of a new Long Term Repo Operations (LTRO), as well as a "tiered" structure being introduced.
Capital Economic chief European economist Jonathan Loynes reminded that the ECB has already signaled that further easing is on the table this week.
"And while December's under-deliverance highlights the risk of another disappointment, the deteriorating economic outlook should persuade the Governing Council to be bolder this time," he said.
"We expect both a 20 basis point cut in its deposit rate and a E20 billion expansion of its monthly asset purchases," Loynes said.
BOA Merrill Lynch economists looked for the ECB to cut the deposit rate by 10 basis points, extend QE until September 2017 and increase asset purchases by E10 billion per month.
BOA Merrill FX strategists saw "short-term risks for the EUR as tilted to the downside from the ECB meeting."
"We would expect Draghi to use a very dovish tone and strengthen forward guidance to argue that the ECB is willing to do whatever it takes to reach its inflation target," they say.
The strategists also looked for ECB President Mario Draghi "to try his best to weaken the Euro that day, to avoid a second disappointment after easing policies again."
Current FX positioning also favors the euro downside, "with the market nowhere near the stretched short EUR position of last December."
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