We expect the ECB to announce another menu of monetary policy easing including a 10bp deposit rate cut together with an introduction of a two-tier deposit rate system and a front-loading of the QE purchases.
The market reaction to this package is likely to be a small disappointment, but it depends on Draghi's communication about the tools and the ECB's forward guidance.
Market expectations are currently high in particularly in terms of rate cuts. Our expectation of a 10bp deposit rate cut will not be enough to fulfil the pricing of a 12.5bp cut.
On the FX side, we expect EUR/USD to be under pressure ahead of the meeting as the theme of Fed-ECB divergence lingers. But, with the ECB set to disappoint somewhat, another move higher in EUR/USD should be expected following the meeting.
In light of the high pressure on the ECB we see some risk that it will be more aggressive than we expect.
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