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Analysts at TD Securities now expect the ECB to announce limited stimulus measures targeting liquidity and tightened financial conditions next week, followed by a 10bps cut to the deposit rate in Q2 2020.

Key quotes:

“Micro EUR liquidity measures which are fundamentally more effective tools to address the virus concern, could come as a disappointment for markets. This is already visible in today’s rate price action. Nonetheless, the enhanced liquidity measures should come as a support for the credits spreads and vulnerable sectors. From a tactical perspective, we enter 5y swap spread tighteners at 38bps targeting 30bps and stop of 42bps.”

“The EUR has rallied sharply in recent days, but we think this mostly reflects short-covering driven by risk aversion rather than a positive reassessment of the region’s fundamentals. Looking forward, we expect EURUSD to remain highly reactive to how policymakers eventually respond from here. The near-term outlook remains highly uncertain as there are many moving parts in the mix. Our base case argues for a bit more upside potential, but much depends on the precise policy mix and its sequencing. Further gains will depend, however, on a significant upward repricing of global growth prospects. In the absence of that, intensified risk aversion could see spot to fresh lows for the cycle.”