In a note to clients today, CitiFX summarized Market expectations ahead of the ECB with the following scenarios ranked from most to least positive for EUR:“1/ No rate cut 2/ Refi plus depo rate 10-15 bps cut 3/ Refi plus depo rate 20-25 bps cut 4/ Option 2 or 3 plus liquidity measures – MRO extension to 2016 and/or SMP sterilization suspension 5/ The above plus FLS/LTRO for SMEs, hints at QE 6/ The above plus an outline of framework for the implementation of QE program,” Citi clarifies.
100 pips down:
Specifically, Citi thinks that a 10-15bps rates cut (including negative depo rate) plus MRO extension constitute market central scenario but the ECB could surprise by delivering deeper cuts and suspending the SMP sterilization.
“That could push EURUSD 100 pips lower, at least initially. We think that there is a scope for greater dovish surprises in the form of LTRO/ FLS as well as indications that QE will be on the cards soon which could keep EUR under pressure in the aftermath of the meeting,” Citi projects.
100 pips up:
“Investors could cut some of their euro shorts helping EURUSD higher toward 1.3700 if the ECB ‘delivers’ but does not exceed market expectations, A disappointment – no change in policy – could push EUR higher still with EURUSD moving close to its May highs,” Citi adds.