Although it sound like a nonsense, a part of the market is preparing for a...rate cut on the next ECB meeting. Investors in the options market are paying the highest premium in almost a month to hedge against price swings in the EUR/USD as the ECB’s meeting on April 21 draws closer.
EUR/USD two-week volatility, which captures the meeting,surges 116 bps, most since February 25. Increase suggests that traders could be bracing for a surprise even though probability of a rate cut implied by the OIS curve is just about 14%.
Investors could be expressing concern about EUR’s strength since its latest meeting; EUR/USD is up about 5.5% since March 10 lows, when the ECB last met, whileEUR TWI has gained about 2.5%. Let us recall that the ECB policy board member Praet said this week that officials will keep acting forcefully if needed.
However, we don’t think that a rate cut or other measure is on the cards right now.
The ECB needs some time to asses the impact of recent package and we think that the only thing that may happen is Draghi trying to talk down the euro during the press conference.