Money markets reluctant to price much more easing

Any dovish signals from the European Central Bank at its meeting next week could give investors the green light to start pricing in unprecedented monetary easing and may trigger a sharp fall in short-term eurozone interest rates. Money market rates are fully pricing in a 25 basis point cut in the key rate to 1 percent on Thursday, but investors remain reluctant to price in further cuts next year.
For that, they would need a sign from new ECB President Mario Draghi that the bank is willing to slash rates to all-time lows to support the eurozone economy and keep inflation within the target. Warnings that the economic outlook is deteriorating and that inflation is expected to fall sharply are usually enough to convince markets the ECB is minded to loosen monetary policy, but Draghi may have to explain more this time, analysts say.
If a move to cut rates below 1 percent became more likely, speculation would then intensify that the ECB might also cut the deposit facility rate below 0.25 percent, which could make it difficult for the bank to sterilise its public debt purchases. Societe Generale's head of rate strategy Vincent Chaigneau said he was waiting to see whether Draghi's speech suggested more easing was on the cards before deciding whether to lower the target of its receiving March Eonia forward position, currently at 0.40 percent. The rate was last trading at 0.43 percent.
The three-month Euribor futures curve had room to rise some 10-15 basis points if the ECB cut rates on Thursday by 25 basis points and looked dovish, according to RBC Capital Markets head of European rates strategy Peter Schaffrik. Three-month dollar Libor also rose and overnight borrowing from the ECB was at its highest since March.