Since the 2013/2015 US taper seems like a pretty good analog to the ECB story, the chart below is a reminder of the time it took from taper talk to rate hike (and all the joy and pain in between). The chart shows the USD move on the day of each FOMC meeting, starting two meetings before the first talk of taper and ending the day the Fed finally hiked (DEC 2015).

While the most memorable meetings were the painful USD-negative surprises in September 2013 and March 2015, the average move was a slightly stronger dollar at those FOMC meetings. I think the ECB’s goal as they slow-mo normalize is to avoid major currency positive surprises. So far so good as the big announcement meeting on December 8th 2016 saw the euro fall more than 1%. Subsequent meetings have seen only small moves in EURUSD. Up 30bps in JAN, up 35bps in MAR and down 30bps in APR.

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Expectations are very tightly centered around this: ECB goes to broadly balanced but sounds very dovish. I think that the market is underpricing the odds that the ECB stay with downside risks for one more meeting given the noticeable rollover in inflation. They are faced with the all-too-familiar dilemma: Do we focus on better growth and political fundamentals or focus on slowing and below-target inflation? The ECB mandate is price stability. I will go into the ECB presser bearish EURUSD, because I think it’s a 15 delta that they don’t go to “broadly balanced risks” and the market has it priced near zero delta. However: My expectations for fun and profit are muted and my base case is that EURUSD flies all over the place tomorrow and ends sharply unchanged. Have a fun and profitable day.

written by: Brent Donnelly, Spot FX Trader, HSBC

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