Central Bank Watch Overview:
- More weakness in Eurozone economic data coupled with a surge in COVID-19 cases has seen ECB interest rate cut expectations pulled forward, and the odds of surprise action at the October meeting are non-zero.
- It’s still the case that neither the Bank of England nor the Federal Reserve are expected to shift policy in 2020; the Fed is grappling with the US election cycle; the BOE is awaiting Brexit.
- Retail trader positioning[1]suggests that the US Dollar[2] has a mixed trading bias.
European Central Bank Rate Cut Odds Pulling Forward
Eurozone economic data has been on a downward trajectory, and now that COVID-19 cases are surging once more, there’s a non-zero chance that the European Central Bank acts sooner than what interest rate markets are currently implying. While the late-summer jump in European Central Bank interest rate expectations has held, insofar as an interest rate cut deeper into negative territory will arrive sooner in the first half of 2021, it’s difficult to ignore the pandemic’s rolling impact.
EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (OCTOBER 28, 2020) (TABLE 1)
According to Eurozone overnight index swaps, there is just a 6% chance of a 10-bps rate cut at the October policy meeting and still just a 24% chance of a 10-bps interest rate cut by the end of 2020. Interest rate cut odds have been pulled forward in recent weeks; in mid-September, there was just under a 15% chance of a 10-bps cut before the end of the year. March 2021 is now favored for the move, according to rates markets, with an implied probability of 53%.
IG Client Sentiment Index: EUR/USD[3] Rate Forecast (OCTOBER 28, 2020) (Chart 1)
