ECB inaction to support EUR
The EUR has been moving sideways since the start of the week but today‟s ECB announcement should inject a dose of volatility, at least in the immediate term. The May meeting left the door open for another refi rate cut but we believe the ECB will be cautious about firing the last bullet from its conventional arsenal. Even with the refi rate unchanged there will be a number of potentially market moving details in President Draghi‟s press conference. The key question is the likelihood of eventually moving to a negative rate on the deposit facility. Recent comments from the Governing Council „core‟ suggested a lot of reservations with regards to the „unintended consequences‟, so it is doubtful that the ECB will signal any move in that direction compared to the „open mind‟ message from May. New staff projections will be watched closely and those are likely to be in the softer direction, although it is also likely that the May refi cut was already based on the notion of a weaker outlook. All-in-all this suggests that the back-and-forth pattern of market reactions to ECB announcements seen through the course of this year could continue, this time triggering a stronger EUR. Upside risks to EURUSD around the announcement are also supported by broader pressure to unwind USD longs recently.
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BNP Paribas