EUR front-end remains mispriced

For the EUR front-end, Draghi's dovish tone and the reiteration that "if anything, the ECB could do more" is likely to keep curves well supported. While shorter dated forwards have repriced lower, longer dated forwards remain too high on a historical basis.

Looking forward, the liquidity backdrop should remain supportive, with excess liquidity breaking above €400bn for the first time in two years, while 2017 inflation forecasts may be revised lower in September, resulting in further action. Risks remain, however, with macro data maintaining improvement. 

"The risk for the rates market is that the ECB wait until September to fight the recent sell-off. With Grexit risks avoided for now and credit dynamics in particular showing improvement, the Central Bank may wait for the September inflation forecasts before taking aggressive verbal action", says Bank of America.