EUR/USD: Scenarios & Trades Into The ECB
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What can we expect from the ECB? Rates decision 12:45pm (7:45 NYT) / Press conference 1:30pm (8:30 NYT).
Base case: 75% probability, EURUSD -0.75%.
Rates & APP remain unchanged, but a dovish press conference, enough to keep September “live”. This is consistent with current market expectations and the Citi Economics view. Short rates suggest a 40% probability of a 10bp deposit rate cut by the September meeting and 80% by December meeting.
Dovish ECB: 15% prob, EURUSD -3.0%.
Pre-committing to September would be the dovish surprise. Watch Draghi’s language. This could take the form of language used by Draghi in January 2015 when the GC signaled the March QE expansion. “…signals coming from the monetary analysis confirmed the effectiveness of the monetary policy measures in place and the need to review and possibly reconsider our monetary policy stance at our next meeting in early March in order to secure a return of inflation rates towards levels below, but close to, 2%.”
Hawkish ECB: 10% probability, EURUSD +2.0%.
This would be the non-committal ECB, i.e. a neutral press conference, unchanged statement, coupled with very little discussion of September or increased risks. In actuality the ECB wouldn’t be hawkish - just less dovish than the market – but EUR would rally. EURUSD expected value over the ECB: -0.82%. Hence we are bearish EUR over the event.
What can we expect from EUR?
A quick, abrupt move – and then more waiting. We are short EUR over the event based on our expected value calculations and positioning/sentiment we infer from EUR flows. Still, we have to point out that 1-week EURUSD vols are at the lows. The market has VERY few expectations into ECB that any move lower in EUR can be sustained enough to break ranges.
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