What will the ECB decide on today? And what will the FX market’s reaction be? We cannot be certain that market reaction on the ECB decision will be “normal”, economists at Commerzbank report.

How will the Euro react in case of a 50 bps step, and how with a 25 bps step?

“For a 50 bps rate step to have a EUR-positive effect again today, the market has to believe that such a step would be appropriate.” 

“If the FX traders consider the situation of the European financial system to be fragile they might consider a 50 bps step to constitute a mistake and come to the conclusion that this would require much stronger or earlier ECB rate cuts. In that case, a 50 bps rate step would have a EUR-negative effect. It is not certain whether the FX market thinks like that, perhaps not even very likely.” 

“I can quite imagine that the Euro will react positively if we see only 25 bps. The necessary condition of such a rate decision being EUR positive would be that the ECB is able to convince the market that if the financial system really does calm down the ‘missing’ 25 bps will be made up for. That means it depends on how convincing Lagarde is today.”

See – ECB Preview: Forecasts from 10 major banks, another 50 bps, but what’s next?