Daily Brief – Tapering

Tapering

As the week has progressed and today’s ECB decision moves into focus, European rates have been tapering in on the 25-basis point cut consensus scenario. Less than a 5% chance of an outsized 50-basis point cut remained priced into overnight rates as of market open this morning. This adjustment will limit any potential Euro selling at 13:15 GMT today if the ECB confirms the most likely policy outcome. However, at the same time the tapering of market implied rate expectations as this week has progressed will exacerbate any potential reaction to a half-point cut which should not be ruled out. 

As a cut in line with consensus is far more likely, any potential EUR selling pressure would be likely to enter the market if a dovish commentary is provided during the press conference. Commencing at 13:45, Lagarde’s presentation of the monetary policy decision could leave longer term yields vulnerable, inviting potential value destruction within the Euro. The impact within EURUSD could be all the more significant given that the longer duration portion of the US yield curve remains well supported following evidence of sustained inflationary pressure within yesterday’s CPI report. 

Playing piggy in the middle, US PPI will be published at 13:30 today between the publication of ECB’s rate decision and press conference. PPI is closely watched as alongside CPI inflation it provides a near-perfect proxy for what the Fed’s preferred PCE deflator release will look like. A 0.2% month-on-month (MoM) publication today should be consistent with a 0.2% MoM reading of the PCE data next week. This could relieve some embarrassment from the Fed and pave the way to a December cut still despite strong CPI readings. 

Discussion and Analysis by Charles Porter

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