FxWirePro: EURIBOR futures and forward curves hint ECB's more easing in guidance

Having been roundly criticised for disappointing market expectations of more decisive policy action in December, the ECB might have been expected to rein in its verbal indications of future policy changes. However, recent communications have continued to send strongly dovish signals.

The spread between Euribor and EONIA swap rate illustrates the money market credit risk premium, i.e. the difference between Euribor rates and the expected future ECB minimum bid rate.

EONIA, EURIBOR overnight - -0.236%
EURIBOR interest rate (6M) - -0.136%

We have to admit large uncertainty on whether they deliver -20bps vs mkt -10bp. This should be less consequential for EUR though as less now increases the likelihood that they leave forward guidance for more and/or drop the deposit rate floor - leaving the EUR reaction largely the same.

The EONIA (Euro Overnight Index Average) rate is the effective overnight reference rate for the euro.

Swap markets appear to be anticipating a fall in overnight interest rates - and, hence, the ECB's deposit rate - of a bit more than 10bps at March's meeting, with another cut in later months.

But a Reuters poll of economists also revealed a strong expectation of a rise in the ECB's asset purchases from the current rate of €60bn per month. The median forecast was a rise to €70bn but the range was from €70bn to €90bn - i.e. all 66 respondents predicted a faster pace of asset purchases.

In the press conference post Draghi's rate decision, eagerness built on forward guidance and that is how EUR's real upside risks materialize. If they suggest no urgency or even chance for more rate cuts, Euribor repricing will force EUR to squeeze higher.

If there is no additional liquidity, equities and credit avenues are likely to underperform , posing EUR higher in spite of easing.