How The Euro Will Respond To The ECB: A Cheat Sheet


With the dollar failing to benefit from yesterday’s surprisingly hawkish Fed meeting, traders are confident that the only alternative is for the Euro to surge this morning after the ECB announcement, in which Draghi may (or may not) preannounce the end of QE. In fact, as Bloomberg’s Vassilis Karamanis writes in his Cheat Sheet for how the Euro will react this morning, the FX strategist writes that ” the euro may gain for the first time in six European Central Bank policy decision days even if President Mario Draghi steers clear of announcing a definite end-date to the institution’s asset-purchase program, trader positioning suggests.”

Some more details from his relatively bullish EUR take:

Even if the losing streak extends on a dovish slant from Draghi, the euro’s decline may be limited, charts and orderbooks indicate. Conversely, it may take more clarity on interest rates from a hawkish ECB for the euro to breach its mid-May rebound peak
Focus on this meeting picked up after ECB Chief Economist Peter Praet signaled that it could be pivotal in deciding an end-date to QE. Option traders agree that this policy decision may be a game changer, at least judging by overnight volatility on the eve of a GC decision
The gauge gained as much as ~13 vols Wednesday to touch 20.30%, rising above the previous pre-ECB meeting peak of 20.16%, reached Sept. 6; Wednesday’s level is the highest such reading since December 2016; even with the Fed meeting priced out, one-day vol remains at elevated levels
It is not surprising to see a wide breakeven for the euro on the event, given the market is far from unanimous on its outcome; a Bloomberg survey of 56 economists conducted June 1-7 showed a third of respondents predicted Draghi will set an end-date for purchases Thursday
Analysts have become more bullish on the euro following recent hawkish comments from ECB officials, even as recent macro data have come on the soft side
It is possible that there is a repeat of the Autumn meetings, when Draghi announced updated growth and inflation projections in September and went on with QE-update decisions a month later. Just signaling that a decision on bond purchases was likely in October sent the euro 0.9% higher to 1.2023 on Sept. 7
Positioning, according to three traders in London and Europe:
Overall, upside risks prevail: short-term names have turned neutral, leaving room for exposure either way; macro and real-money accounts …read more



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