We are sticking with our view that the ECB will:
1) leave the SMP unsterilised and
2) cut its key policy rates by 10bp at its meeting next week.
What remains uncertain is whether the ECB members have acquired sufficient information to build a consensus to act.
ECB meetings are unpredictable. In November the consensus was that they would not cut rates but then they surprised with a 25bp refi cut.
After the February meeting, Draghi said the ECB wanted to evaluate new information, emphasising new staff projections for 2016 as well as data on credit, Q4 GDP and EM developments.
While the ECB has made it clear it does not see deflation, the key is how policy is set up to maintain medium-term price stability. Some such as Ewald Nowotny think inflation will “self-correct” but this view is unlikely to be shared by the majority of board members.
Others see the weakness in price developments as extending to the medium term (Peter Praet) and even close to an area where inflation expectations could be altered (Benoit Coeure). These are all views that require pre-emptive action, but a 0.8% print on inflation over the last three months (December to February) creates little urgency to act.
Options look attractive, should the ECB surprise and we have already talked about March 99.75 Euribor calls that have a theoretical value of one tick and would also look at euro/US dollar puts.
On Friday we suggested a two-week euro put/US dollar call which had a theoretical value of 20 pips and is attractive because:
1) euro/US dollar since October has found it difficult to stay above 1.38; and
2) when it has traded above 1.38 spot has moved back below 1.3650 within six to seven sessions.