ECB: The first cautious step towards policy normalization - ING

Analysts at ING estimate that market is currently pricing in around 2% worth of ECB QE taper premia in EUR/USD and this contrasts with ING estimate of 6% worth of total upside to EUR/USD from a fully priced out ECB QE.

Key Quotes

“This suggests around 4% justified EUR/USD strength when the market fully prices in ECB QE tapering this summer. Target EUR/USD 1.15.”

“Reaction in the bond market

• Long-end Bund yields in focus as this is the part of the curve that would be affected by QE tapering (given that the ECB asset purchases are the main reason for lower 10y yields).
• A limited QE taper premium is priced into Bunds, suggesting a nonnegligible increase in yields once tapering is signalled. This may happen at July’s ECB meeting, so don’t expect fireworks next week.
• This should be reflected in the new ECB staff projections. That means a drastic change in the policy stance does not make sense.
• But even though inflation rates have not yet made it back to the ECB target, deflationary worries have clearly disappeared. This means the ECB should start preparing markets for a very cautious and gentle first step towards policy normalisation.”