A quiet ECB event
Market commentary has paid very little lip service to today’s ECB decision. Despite the Eurozone facing challenging and conflicting fundamental economic forces, the market is ascribing a very low risk profile to today’s decision. That’s also despite ECB rate expectations having been on the move following their 25-basis point hike to the deposit rate in June. It’s not to say that the ECB is irrelevant in today’s market, far from it. Instead, it reflects the expectation that amidst a turning tide for the European economy, very little will be offered in terms of immediate change or forward guidance.
In fact, the market is so confident that the ECB will not take any action to its main instruments at today’s event [13:15 BST] that all economists surveyed by Bloomberg (41) have forecasted a hold. That’s the first time we’ve seen such unanimity since the April decision when the outlook for ECB rates seems far more predictable. The Iran conflict will continue to be a major cause for the ECB’s malaise given the economy’s sensitivity to energy prices.
Implied volatility as of the European market close yesterday stood at just 7.02% implying only a circa 40 pip break-even trading range. Despite the market clearly identifying today’s ECB decision as a non-event, there remain expectations for adjustment further down the curve. There is a good chance of a rate hike at any or all of the following three meetings prior to year-end. With volatility as cheap as could be, markets could be vulnerable to any surprises particularly within the language or forward guidance offered by the ECB President today.
Discussion and Analysis by Charles Porter
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