Trader’s are eagerly awaiting today’s European Central Bank decision and ECB press conference, still an open question whether Mr. Mario Draghi can bring a shiny new gift or a lump of coal for expectant bears.

 

After plenty of series pacifistic signals over the previous couple of weeks, the key question is that the ECB will ease policy today; Most of the traders expect the ECB to be extremely accommodative today; in fact, promise down the market’s actual expectations are crucial to the reaction within the euro, European equities, European Bonds and fixed financial gain within the wake of the announcement. The ECB’s toolbox of potential easing measures is huge, stretching from traditional interest rate cuts deeper into negative territory to increasing its in progress QE program to a lot of esoteric concepts like a two-tiered deposit rate or buying bundled credit risky loans.

 

Logistically, there are some constraints that the ECB can get to navigate so as to expand its ongoing non-traditional easing measures. Below current rules, the European central bank is not allowed to buy bonds with yields but its deposit rate, neither is it allowed to have more than 33rd of any specific bonds total provide. Of course, there are two potential work around here: either lower the deposit rate or just loosen/abolish the restriction itself. As of writing, EONIA futures are pricing in a very 10-15bps cut to the ECB’s deposit rate, which might open up plenty of bonds for purchase in and of itself. Given the clear signals recently and entrenched market expectations, a deposit rate cut of a minimum of 10bps appearance possible, with plenty of aggressive 0.20% cut probably on the table moreover.

 

In terms of the bank’s QE program, it may also choose to change the period, quantity, or composition of monthly asset purchases. an extension of this “soft” deadline of Sep 2016 (say, to March 2017) would be among the smallest amount aggressive moves the ECB might build and if accompanied by only a small deposit rate cut, could lead on to a “sell the rumor, buy the fact” reaction in EUR/USD (in alternative words, EUR/USD might get better toward the 1.07-1.08 zone).

 

Additionally to a 10bps+ cut to the deposit rate, this is able to possible entail increasing the monthly volume of bond purchases to €70B or €80B from this €60B pace. In this case, we tend to could absolutely see any downside within the euro and sure upside in European equities and fixed income.

 

Short euro and long bunds opportunities