Euro bulls unlikely to take solace from ECB’s final meeting in 2018

Euro bulls looking for signs of life in the currency before 2019 are unlikely to find it in the European Central Bank’s final meeting of the year.

While option traders’ sentiment on the common currency versus the dollar has improved from last month, the market bias is still slightly in favour of puts, risk reversals show. President Mario Draghi is set to confirm Thursday the conclusion of net asset purchases by the end of the month, but any additional hawkishness is unlikely amid geopolitical risks and signs of a slowdown.

One-month volatility in the euro fell below this year’s average after markets questioned the pace of global interestrate increases and recent disappointing regional data pointed to the need for the ECB to lower its growth and inflation projections.

While this may mean that the Governing Council remains on hold for longer, thus suppressing volatility, it may also lead to another round of weakness in the common currency.

Money markets have pushed back expectations for the first ECB interestrate increase to March 2020, while ongoing pessimism is also reflected in Bund yields touching 0.22%, the lowest level since May. One-week risk reversals showed that while bearish sentiment in the euro fell to the least in almost a month Thursday, they remained in favor of put options.

However, in the near-term traders face turbulence as Brexit comes to a head with UK Prime Minister Theresa May’s deal looking highly doubtful to make it through Parliament at Tuesday’s vote. The euro has been sensitive to Brexit news, and even though its volatility lags sterling’s by some way, another rally for cable gamma could see options traders supporting the common currency’s too. One-week euro volatility spiked Friday to the highest in a month.

Still, Thursday’s ECB policy decision should be straight forward with the key rates seen being held steady, while traders will focus on any comments from Draghi on reinvestment, new long-term loans and Italy.

What to watch: Italian Deputy Prime Minister Matteo Salvini holds a press conference in Rome today. Prime Min- ister Giuseppe Conte speaks to Italy’s lower house of parliament on Wednesday. The UK House of Commons votes on Theresa May’s Brexit withdrawal deal on Tuesday, which she is expected to lose; a landslide defeat could risk a major political crisis.

ECB vice president Luis de Guindos speaks at the European Statistical Forum organised by the central bank on Tuesday. ECB’s final meeting of the year on Thursday, where policy makers are set to cap asset purchases at €2.6tn.

SNB’s decision the same day, where it is likely to continue its two- pillar strategy of negative interest rates and a willingness to intervene in foreign-exchange markets, after the economy unexpectedly contracted in the third quarter.

ECB vice president Luis de Guindos and executive board member Sabine Lautenschlaeger speak on Friday. Economic releases include US CPI and retail sales, Germany Zew investor confidence, euro-area preliminary PMIs, and UK GDP and labour-market data.

Euro bulls looking for signs of life in the currency before 2019 are unlikely to find it in the European Central Bank’s final meeting of the year