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EURUSD bias tilted towards downside as we head into ECB - TDS

FXStreet (Delhi) – Research Team at TDS, suggests that the ECB will surprise, no matter how bold expectations are, and given what we expect we still see risk-reward for EURUSD downside in Trading the ECB.

Key Quotes

“We see 1/3 chance EURUSD trades higher, 1/3 trade flat to slightly lower (1.06-1.04), and 1/3 it trades below 1.04. We also see value in being long the green pack Euribors, as opposed to the front contracts, as it is the lower for longer message which seems most mispriced in the market right now, and there may be implementation issues in a two-tiered deposit rate which delays its full operation for some period of time. As a final summary of key signposts on the day:

Rate announcement (12:45 GMT): We look for a 20bps cut, more than priced in or expected by consensus. But for a 10-20bps cut, the market will not be sure that there will be no further news on the rate-setting front at the presser, given rumours of a two-tiered system that we wouldn’t know about for 45 minutes. But if we get more than a 20bps cut, the market will probably assume that is the lower rate.

Opening Statement (1:30 GMT): The flow of the remarks should be first an announcement of the augmentation and/or extension of QE, where we look for an augmentation from €60bn to €70-75/month until at least March 2017, but more likely leaving the end-date open-ended. Next would be TLTRO/LTRO announcements, where if the ECB extends TLTROs from mid-2016 to mid-2017 or later, this is where the green and redpack Euribors can rally significantly as it implies no rate hike over that period. Next would be the change to reserve maintenance to manage liquidity through the tiered deposit rate structure where there would be a risk for Eonia to trade higher if too much excess reserves are spared. And lastly, if Draghi continues to use language of “using all the instruments available”, then the ECB is considering cutting rates further in the future.

Beyond that, GDP and inflation forecasts will likely be cut again but are largely irrelevant for market direction. Similarly, the Q&A is less important than usual once the measures themselves are announced, outside of the risk Draghi rules out or pre-commits to something more. But we think Draghi will continue to pledge to do ‘whatever it takes’.”

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