Limited ECB effectiveness means euro bullish risk - SocGen

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 8, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Olivier Korber, Research Analyst at Societe Generale, suggests that the ECB meets on 10 March, and the bar is quite high to deliver convincing actions that can keep the ongoing euro correction on track.

    Key Quotes

    “We are approaching the effective limit of the ECB’s tools.

    Main risk – a timid rate cut: Near-term EUR/USD moves are still mostly driven by relative interest rates, so rate cuts are the channel with the largest FX impact. Our in-house scenario is a 20bp cut in the deposit rate. The market is pricing a 10bp cut fully, and a 15bp cut with nearly 50% probability.

    Brexit risk means ECB should probably retain its arsenal: The ECB is not out of ammunition. Besides rate cuts, it can accelerate asset purchases and extend liquidity operations. Extreme situations could involve the use of outright monetary transactions (OMT) or helicopter money. Actions perceived as significant by the market are likely to be undertaken cautiously. The risk of a Brexit scenario in H2 suggests that the ECB should refrain from a decisive increase in monthly purchases so that it would be in a better position to address this kind of external shock. Our economists do not expect asset purchases to be accelerated in March.

    Negative flash CPI raises disappointment risk: The February flash CPI printed below expectations, returning to deflation territory (-0.2% mom),increasing the pressure on the ECB to dampen the downward spiralling inflation expectations. This means that disappointment risk prompting a euro bounce is now somewhat heightened.

    The euro’s recent fall implies asymmetric risk and gives the ECB some time: The recent economic dataflow highlights the contrast between slowing growth in Europe and recovering momentum in the US. This widened the negative 10y rates differential and pressured the euro retracement towards the 1.08 support area. Given the 1.05-1.15 range prevailing since the start of 2015, the risk is currently asymmetric with more room upwards than downwards. Moreover, with the EUR/USD only 3-4 cents above the 1.05 low, the ECB is unlikely to be preoccupied by currency strength. If the market is disappointed by the ECB, a bounce from 1.08 and a target of 1.13-1.14 is a likely scenario.”
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