Macro Digest: It's time for the ECB to panic

Macro 5 minutes to read

Steen Jakobsen

Chief Investment Officer

Summary:  Today's European Central Bank outing sees ECB president Mario Draghi staring down a wall of negative incoming data amidst the lowest EURUSD volatility in history while markets look for a policy response.


Heading into today's European Central Bank meeting, a few things seem abundantly clear. First, the ECB is not only behind on its growth forecast; it has essentially 'stopped out'. Note that while Europe's central bank is projecting 1.9% growth for 2019, the private sector is only calling for 1.3% and the Organisation for Economic Co-operation and Development forecasts a mere 1% of expansion.
OECD
Source: OECD
Second, the ECB's 'old' package of Targeted Longer-Term Refinancing Operations, or TLTROs, runs out in 2020. Fundamentally, the ECB does not believe in applying more stimulus from quantitative easing and TLTROs but it needs to build a bridge to a 'fiscal expansion/modern monetary theory' stance in end-2019. 

The market has priced in TLTRO operations; look at the Stoxx Bank Index (SX7E), which is up by more than 14% year-to-date. Consider as well that the Bundesbank does not favour further buying.

We are in a period of record low volatility in EURUSD, with today's meeting having the ability to shake things up significantly, depending on the ECB's statement.
EURUSD volatility
EURUSD volatility is cheap. As such, we are looking at options straddles or EUR puts into today's meeting.

The market is more likely to be disappointed by any potential 'delays' raised in today's announcement. In our view, such an outcome could see EURUSD break 1.12.
EURUSD
Source: Saxo Bank

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