BNP: Deeper deposit rate cut likely, stay bearish on the EUR

From the FXWW Chatroom – Our economists have revised their forecast for the ECB’s 3 December policy meeting, now expecting a 20bp deposit rate cut (from 10bp previously), in addition to a EUR 10bn increase in the monthly rate run of asset purchases and a 12m extension of the programme to September 2017. Our economists highlight that recent reports of a two-tier application of the negative deposit rate suggest a bigger cut than before is being considered. The benefit of a two tiered system is that it would likely have a similar depreciation impact on the EUR compared to a system where the deposit rate cut is applied to all excess liquidity, while penalising banks by less. Interest rate markets are currently pricing in a 15bp deposit rate cut. Accordingly we expect the EUR to remain under pressure as expectations for ECB action continue to build, particularly given that short EUR positioning remains light as signalled by BNP Paribas FX positioning analysis. We target EURUSD reaching parity in Q3 next year. 

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