We believe ECB is more then likely to cut by 50 bps in the 12th Dec meeting. Our reasons stem from the following facts: 1. Significant increase in Russia Ukraine tensions recently. 2. Significantly weaker than expected Nov PMIs for Germany & Eurozone. 3. Eurozone economic growth profile is weakest amongst DMs. 4. It’s large bilateral surplus with the US makes it a target of Trump’s trade agenda. 5. Productivity growth is sluggish. 6. European Central Bank (ECB) policy rate cuts are the easiest path to stimulus. 7. Fiscal resources are limited. While EURUSD has seen a significant fall this week due to above narrative, ECB rate pricing for 12th Dec meet has yet not shifted meaningfully. Market is currently only pricing 48% probability of a 50 bps cut in the 12th Dec meeting. This to us looks a trading opportunity via the 3-month ESTR. We believe next week’s CPI release figures in Eurozone might give us entry in the above trade strategy as we expect the Nov inflation nos to come higher than Oct. Trade Recommendation: Receive 3month ESTR (3-month Euro Swap) at 2.90, SL 3.00, TP 2.70. CMP 2.81. Risks to the view: ECB does a neutral 25 bps cut in 12th Dec meet.
