Anyone expecting major volatility to emerge out of today's ECB presser, will be disappointed: as discussed previously, today's Mario Draghi press conference is expected to be a snoozer (the statement which hit earlier was identical to last month).
Consensus expects today's announcement to be largely a continuation of the theme, with June/July touted as a more opportune time for the ECB to unveil their next stage of major policy announcements.
As a result, Draghi will likely make some reference to the recent softness in data but ultimately maintain that risks to economic growth are ‘broadly balanced.’
For those who missed our preview, here is the one-chart summary courtesy of ING on how the market is likely to react to Draghi's words.
If that's not enough, here is a more detailed cheat sheet courtesy of Bloomberg, which notes that the euro has weakened on each of the past four days that Mario Draghi has delivered the European Central Bank’s monetary policy decision. It may make it five in a row should the central bank sound dovish today, charts and trader positioning suggest.
- Traders don’t see the meeting as a game-changer and expect a rather contained response in the currency market, with overnight volatility in the euro trading Wednesday at the lowest level ahead of a monetary policy decision in more than a year; still, there is potential for a slide of about 0.8%, which last happened a month ago
The euro has dropped nearly 2% since its cycle high on April 17, while risk reversals have turned in favor of euro puts; The recent slide seems to be have been driven mainly by the U.S. side of the equation as the currency market turned rates-driven and the spread between U.S. and German yields widened
That suggests a dovish Draghi may not have been fully priced in already, and the euro could drop below 1.2100; a close below 1.2030 may mark the start of a fresh leg lower that could target a move below 1.1600 on an Elliot Wave basis
- Currency may test support at $1.2030-$1.2090, with $1.2070-$1.2090 being the key area in focus; a drop toward $1.2070 would represent a slide of 0.8%
- Any attempt by the ECB President to downplay growth or inflation concerns may spark a knee-jerk reaction toward 55- DMA resistance as short-term short positions will look for cover
The market’s base-case scenario looks for no changes in policy settings or language, mostly focusing on any clues President Mario Draghi may give on the wind-down of the ECB’s monetary stimulus program
Economists surveyed by Bloomberg have pushed back expectations and now see a rate increase by the end of 2019 Q3 and re-investments of maturing debt for up to three years; click here for ECB preview
- EURO TWI trades little changed compared to March 8, the day the Governing Council last met; in theory, there should be no verbal intervention on the currency given volatility -- the ECB’s main source of concern -- has eased considerably; one-month realized vol trades at 5.77%, the lowest in three months and more than one vol below past-year average
Positioning, according to traders in London and Europe:
- Short-term names are short the euro, while real money has been slower in adjusting exposure
- Corporate names were seen on the offer this week while macro accounts have been the most active sellers around
- Interbank desks look to fade a dip unless Draghi sounds genuinely worried
- CFTC data show leveraged investors hold longs close to a four-year high, while asset managers are the longest they have been the common currency on record
- Bids at 1.2070-90 and 1.2030-50; offers at 1.2250 and 1.2280-00
- Market looks long gamma at current levels; trailing stops on shorts seen above 1.2300
- Traders account for downside risks on tenors up to one month; one-week 25d risk reversals trade at 30bps in favor of euro puts, the most bearish sentiment for the common in nearly two months;
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And with all that in mind, here's Draghi: