The ECB meeting on March 10 kicks off the monthly round of central bank meetings. Among other major central banks that will decide on policy over the next days, the UBS team believes the ECB is the one with the most urgent need to deliver some sort of additional easing. Against this backdrop, UBS expects the euro to fall rather than rise after the ECB meeting, probably to the lower end of the 1.05-1.10 range.
Key Quotes
"The other two G3 central bank meetings will follow, with the Bank of Japan on March 15 and the US Federal Reserve on March 16. Other major central banks outlining their monetary policy decisions this month are the Bank of Canada (March 9 ), the Bank of England, the Swiss National Bank and the Norges Bank (all on March 17)."
"Among all of these central banks, we think the ECB is the one with the most urgent need to deliver some sort of additional easing. The pressure is rising on several fronts. First of all, runnin g inflation remains in negative territory. The expected rise in inflation has yet to materialize, which must be a disappointment for the ECB council and ECB staff. They will be providing a new, and likely lackluster, report on the Eurozone's economic outlook. Several ECB officials have said that things have definitely changed since December."
"Market expectations for inflation, measured with inflation swaps, have fallen strongly over the last two months. Investors were obviously responding to subdued inflation and the somber business climate. But these arose even though the euro depreciated markedly against the USD - a move that usually lifts both sentiment and inflation."
"In sum: markets have built up expectations for an ECB rate cut of at least 10 basis points. The risk has increased; however, that a much larger cut - maybe 30bps - will be introduced. Market expectations are for perhaps some new form of credit purchases or a simple increase in monthly governme nt bond purchases."
"The markets' expectations of additional ECB easing are high. Ironically, they seem to have forgotten that they accused ECB President Mario Draghi of under-delivering in December, and claimed that he lost all credibility. Still the ECB is under pressure to act. Net-net, we expect the euro to fall rather than rise after the ECB meeting, probably to the lower end of the 1.05-1.10 range. In such a scenario EURCHF is also likely to drift down further towards 1.06."
