Despite the rate differential versus the USD moving gradually against the euro, the EUR/USD is close 1.38 and as we approach the closely-watched March ECB meeting next week, the key question is whether the Governing Council will be able to deliver a dovish surprise and shock the euro lower.
In this regard, Nomura thinks that there is indeed a good chance that the ECB will ‘do more’ but the problem from a trading perspective is that quite a bit is already priced.
“Non-sterilization of SMP liquidity and enhanced forward guidance will probably not move the rate curve or the Euro much. The more powerful option of a negative deposit rate could shock the Euro, but seems less likely,” Nomura argues.
“Meanwhile, the option of ‘no move’ or postponement of the decision, should not be ruled out and could actually support the euro, given current forward rate pricing,” Nomura adds.
“As such, we don’t think there is a strong reason (risk-reward setup) to move to a short Euro trading stance into the March meeting. For the time being, foreign equity inflows into the Eurozone remain persistently strong, and this is one reason why Euro weakness continues to be averted (despite rate differentials moving gradually against the euro),” Nomura advises.