UBS cheat-sheet for trading ECB

02 December,, London – UBS believes that ECB is poised to ease monetary policy at tomorrow's meeting and has prepared for the market a range of monetary tools. Analysing the likely market reaction under a variety of conditions, UBS has created a cheat-sheet for trading ECB, which currency investors can use as a quick guide during and past the event.

UBS cheat-sheet for trading ECB

UBS cheat-sheet for trading ECB

What is priced in?

"We think that the market is pricing a cut in the ECB’s deposit rate of 13.5bp on 3 December and by a further 6.5bp within the next 12 months,” UBS projected.

According to the calculations, the central bank’s sovereign bond purchases are expected to increase by €8.5bn on monthly basis, along with an extension of the end-date of the asset purchase program from September 2016 into 2017. As sovereign bond purchases represent approximately 70 percent of all €60bn monthly asset purchases, this indicates a monthly increase of all bonds of about EUR12bn.

How will EURUSD react?

“If the ECB delivers more easing than markets are pricing, the year's low in EURUSD is likely to be tested, though we do not see attractive risk-reward to being short EURUSD at current levels,” UBS argues.

The potential for the second quantitative easing (QE) program to move the Euro lower is less than was the case with QE1, due to the different trading points for the currency and better Eurozone economic growth relative to earlier in the year.

Moreover, although monetary policy divergence favours lower EURUSD, economic convergence and valuation are pushing in the different direction. The gap between core inflation in the Eurozone and US is the narrowest it has been in a number of years, and the EU’s manufacturing PMI has become higher than the US manufacturing ISM, UBS finished.

Consider reading: Technical outlook for EURUSD

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