ECB – To Cut, Or Not To Cut, That Is The Question

A sure thing is always a dangerous bet and more so when it's in reference to the ECB. However, it's widely expected that that they will cut the benchmark interest rate by -0.25% to +0.5% this morning while keeping the deposit rate unchanged. The real surprise from Draghi and company could come from any further hint or announcement of non-conventional measures.

If the ECB only delivers a -25bp refi-rate cut without any non-standard measures, the market should be disappointed- weighing on the EUR outright against the dollar. A rate cut with additional measures is likely to have a mixed impact on the 17-member single currency. While the cut would likely undermine rate support for the EUR, announcement of measures targeted at SMEs may compress the important "peripheral yields" – which could end up being a net supporter of the single-currency. The BoJ's Kuroda should be happy with this, as EUR/JPY will be expected to outperform under this scenario.

The most...