– Robust Chinese data supports risk appetite
– ECB: whether to ease?
– BoE likely unchanged
EUR: Still dovish? The ECB meeting will be a key focus this week. There is an outside possibility that the central bank elects to cut its repo rate, following up on the dovish comments and weak growth forecasts delivered at last month’s press conference. Our economists think the data flow and financial market stability over the past few weeks makes an easing this week unlikely. Still, President Draghi is likely to continue to emphasize risks to growth and his willingness to ease, perhaps downplaying the significance of recent upside surprises. We think the EUR is vulnerable to a recovery in easing expectations and price action could be similar to what we saw coming out of last month’s press conference. Our rates traders note that the June 2013 Euribor contract is actually trading lower in price than it was heading into the last ECB meeting, and that the Euribor curve is now priced for EUR three-month rates to rise nearly three-fold over the next few years. This leaves the EUR vulnerable to loss of interest rate support if the ECB eases or simply continues to send a dovish message.
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