EUR: ECB stepping in on fragmentation?
The European Central Bank's Governing Council has announced it will hold an ad-hoc meeting today “to discuss current market conditions”. Since most of the price action in the eurozone’s bond market since last Thursday’s ECB meeting has been about fragmentation, markets are likely making the association that the meeting will aim to actively discuss an anti-spread tool which was expected to be announced at the July meeting. The move to call an ad-hoc meeting appears to be in contrast with what we heard from Isabel Schnabel yesterday, who appeared to see no urgency to pre-announce any measure to reduce bond-market fragmentation.
The 10-year BTP-Bund spread has returned to the centre of market focus, having widened around 40bp in a week and now approaching the levels last seen at the peak of the pandemic-induced market turmoil in 2020. Futures point to a 20bp rally in Italian yields after this morning’s ECB headline.
Markets will now await some ECB headlines sometime today, and all this should make the long list of ECB speakers even more interesting to watch. The main speech will come from Christine Lagarde this afternoon, but we’ll also hear from three hawks this morning – Robert Holtzmann, Joachim Nagel and Georg Muller – and another one – Klaas Knot - later in the day. On the more dovish front, we’ll hear from Pablo Hernández De Cos, Fabio Panetta and Mario Centeno.
So, we could indeed see some action in EUR/USD – which has risen to 1.0450 after the ad-hoc meeting news – before the Fed meeting, which will later drive nearly all market moves. As highlighted above, there are some risks of a small correction in the dollar today, and if this combines ECB steps with some reassurance for Italian bonds, we might see a mini-rally in EUR/USD today to the 1.0520-1.0550 mark today. However, as we see any dollar correction as short-lived, our base case remains a return to sub-1.0500 levels in the coming days.
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