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The ECB-doves are flying high today
The Euro-Complex is under decent selling pressure before the critical European Central Bank meeting and President Draghi’s press conference. It is fair to say the market is expecting fireworks.

On top of an expansion in its monthly bond purchases from 60 to 75 billion euros, the ECB is expected to chop an additional 20 to 40 basis points off the deposit rate into the uncharted area.

The market is now habituated to dovish ECB promises followed by surprisingly more dovish action. In this sense, the market could well be pricing in more than what Mr. Draghi can deliver.

The major question is, how dovish could Draghi be to avoid a EUR appreciation? Is there an emergency need for a sharp policy action, knowing that the Fed will certainly hike the Federal funds within the next two weeks?

Released yesterday, Eurozone’s November inflation estimate added an extra layer on dovish ECB expectations. Preliminary data showed that the Eurozone core inflation could well slip below 1%y/y and the falling energy and commodity prices are still not in favour of Mr. Draghi’s inflation mandate. Reason enough to keep eyes firmly fixed downward.

The euro could well appreciate should the ECB fail to satisfy the market appetite for more cash. Nevertheless, there is little chance for Mr. Draghi to let the bulls gain territory during his press conference.

Options due today are mixed at 1.06, while large put expiries trail below 1.0550. Traders should stand ready for two-sided price action. In case of a short squeeze, 1.08-1.10 are pointed as convenient levels for those willing to rebuild their euro short positions. The bias remains bearish with the anticipation of a further slide to 1.0500/1.0450 zone. The parity could well be around the corner within the next six months.


Meanwhile the Fed is moving to the first rate hike

According to the ADP employment report, the US economy added 217’000 new private jobs in November. The consensus for the nonfarm payrolls is a solid 200’000. Even in case of a slight miss, the December rate hike will be kept on the agenda. The chances of the December rate hike moved from 70% to 74% as FOMC Chair Yellen said she is looking forward to the day of the rate hike and that delaying the lift-off raises risks of overshooting the targets.

However, she has made no comment on the future path of normalisation.
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