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This week, we’ve got one of the most anticipated ECB policy meetings to look forward to. Given the weight of expectations, the risks are skewed against the euro this week.
Mario Draghi’s task at the ECB meeting this week is to satisfy the demands of hawks, who want the asset purchase programme to cease by the end of 2018, and apparently, to do with total purchases below EUR 2.5trn, while at the same time placating less hawkish members who don’t want a sudden stop and definitely don’t want a stronger euro.
EURUSD has been twisting sideways for almost three months, and there is a broad consensus of a taper announcement this week with the expected purchase target coalescing around €30bn/month for nine months.
Option pricing of the October ECB event risk is a tad expensive in our view since the likely outcome of a slower-for-longer QE extension is now the consensus, and given the recent history of consistent under-delivery in EUR-crosses on ECB meeting dates.
The post-ECB roll down in short-dated EURUSD implied vols is overstated, and there is much better value in owning 1M forward volatility after the event.
