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ECB meet today - preview and what to expect for the EUR

Discussion in 'Fundamental Analysis' started by ForexLive, Mar 10, 2016.

  1. ForexLive

    ForexLive Forum Member

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    The European Central Bank meet on monetary policy Thursday 10 March 2016 Preview & EUR outlook from Bank of America / Merrill Lynch This is via eFX, more bank analysis and trade re commendations there Ahead of Thursday's ECB meeting, our call has not substantially changed from four weeks ago. We think moving away from the capital key-which in our view would be the ideal option-remains politically controversial and would push the holding threshold beyond 33%. Buying below the deposit rate is the most technically elegant and least politically sensitive solution and is thus our baseline. We reiterate our view that this should be accompanied by a commitment to maintain the average maturity close to the current level. Our economists' baseline scenario for the ECB is unlikely to be a game-changer for the EUR. We believe buying more safe assets for longer will not support the market's risk appetite, and banks have not been eager to borrow from the TLTRO so far. These policies could have a temporary market impact, but we do not see how they could offset the implications of global risk aversion for Eurozone markets, or the investors' concerns about the European banks. 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. We would also expect him to try his best to weaken the Euro that day, to avoid a second disappointment after easing policies again. Positioning helps, with the market nowhere near the stretched short EUR position of last December. Indeed, our last FX Vol Trader report has recommended a EURUSD 3m 1.00 digital put as a high risk-reward trade if the ECB exceeds modest market expectations. We have argued that global factors are at this point a stronger driver for FX than domestic monetary policies, as the BoJ discovered in January. Post ECB, we see the US data and global market sentiment as the main EUR drivers. In our view, sustained EUR weakness needs the Fed to continue hiking rates, in addition to more ECB easing, and stronger global risk appetite.

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