Previewing Today's ECB's Decision

With Europe once more unfixed, its economy mired deep in a double, and in some cases, triple-dip recession, Italian elections leading to many months of political uncertainty (and according to a new Corriere poll, Beppe Grillo now has 28.7% of the vote, his popularity soaring +3.1% since the election, ostensibly making him the biggest party in Italy), the French finmin saying the outlook for Euro area growth outlook is "very worrying" a few hours ago, and otherwise every indication that the European "fixing" has thoroughly failed once more, following the massive miss in German Factory Orders which printed at -1.9% on expectation of a +0.6% January number, many will be looking to today's ECB meeting to see if Draghi will cut European rates further. The EUR has tumbled 700 pips in a month (with Goldman having shorted it all the way on the way up) on fears the Italian may do just that, although the sell-side consensus is less confident. Of all the banks polled, only JPM and to a lesser extent Rabobank believe Draghi will announce another 25 bps cut today. What will Europe do today, and will it proceed to take some of its interest rates negative for the first time ever, proving once and for all its economy is the worst its ever been? Find out in just over an hour.

In the meantime here is what the "consensus" thinks courtesy of Bloomberg:


  • 25Bps ECB cut seen this week; stay long Eonia

Goldman Sachs

  • Expect no change to ECB policy, in line with consensus


  • Expect ECB to cut refinance rate by 25bps though it’s a close call; ECB’s revised macroeconomic projections will also be watched
  • ECB is expected to remain on hold this week though risks for dovish ECB is increasing; growth indicators will be important and suggest watching 4Q GDP this week, Hans Redeker, strategist at Morgan Stanley, writes in note
  • Maintain EUR/USD short; sustained move below 1.3000 opens way for 1.2660 target

Morgan Stanley:

  • Market will be looking for dovish guidance; EUR was introduced to statement last month though recent EUR decline suggests reference won’t be adjusted, Hans Redeker, strategist at Morgan Stanley, writes in note


  • ECB to keep rates unchanged; Draghi should maintain dovish tone and reiterate that highly accommodative monetary policy stance remains appropriate, Thomas Harjes, economist at Barclays, writes in note
  • Chance of 25bps cut in refinancing rate to 0.5% is higher than from a month ago especially if ECB lowers GDP/CPI outlook


  • Focus on Draghi’s wording; rate cut may be as soon as April if he signals medium-term downside risks; cut isn’t imminent if he describes it as balanced, Valentin Marinov, strategist at Citigroup, writes in note
  • EUR reaction depends on extent of dovish surprise; markets already priced for more dovishness and if there’s no cut, or Draghi fails to signal rate move soon, EUR could consolidate with potential upside vs GBP and JPY

Deutsche Bank:

  • Risk is tilted toward more easing though not in form of interest-rate policy; ’’credit-easing’’ liquidity policies are more likely in next few months
  • Expect Draghi to maintain cautious tone
  • Certain financial conditions have eased since last month such as EUR decline and lower than est. repayment of 2ndLTRO


  • Doubt ECB will cut rates today though a cut is likely by June/July; key today are the updated forecasts with risks of downward revision after weak start to 2013
  • Risks of downbeat press conference which could undermine EUR, but if there’s no rate cut, Draghi would use press conference to justify that


  • Market is looking for revisions to ECB forecasts; 2014 CPI forecast (currently 1.4%) is probably the most important forecast to watch
  • EUR/USD could get hit hard if ECB shifts inflation risk “to the downside” from ’’broadly balanced,’’ though such a move is likely too early for the ECB
  • EUR/USD is a sell at 1.3050/60, for a move to 1.2880

Credit Suisse:

  • ECB to hold though may prepare ground for rate cut with new growth and inflation forecasts; rates strategy team assigns 30% chance to refinance rate cut this week; 25bps cut is likelier in 2Q than in March
  • Further loosening of collateral framework to support credit to SMEs may also be in pipeline

BNP Paribas:

  • Markets aren’t priced for ECB move this week; focus will be on overall message especially on new forecasts and inflation risks
  • A refi rate cut isn’t EUR detrimental as Eonia is close to deposit-rate floor; overall EUR outlook is constructive as long a peripheral bond stress is contained


  • Rate cut may be likely if ECB revises down “already bleak” GDP growth projection given inflation outlook is below target
  • Commerzbank sees stronger case for upward revision of forecast; schatz yields may rise in this scenario


  • Assuming no rate change, expect neutral/dovish bias from Draghi; bearish EUR/USD


  • No change to ECB rates today; hard to justify a cut with EUR down 2% since last meeting and modest easing in short-term EUR rates
  • Scope for easing in ECB forecasts, though unlikely sufficient to trigger change in policy
  • Markets expecting dovish tone from Draghi, though risk is that he is more neutral, and EUR rallies in response


  • ECB to leave monetary stance unchanged; possible dovish revisions to macroeconomic forecasts unlikely to lead to material change in Draghi’s rhetoric, Luca Cazzulani, strategist at UniCredit, writes