Divyang Shah, Senior IFR Strategist
But the EONIA curve has significantly diluted the ECB’s forward guidance with the bid/receive side of 12x24 EONIA now trading above its closing level of July 4.
On the day of the ECB meeting we saw 12x24 EONIA dip below 20bp but slowly the market has failed to trade below these lows last week but upside was capped at just above 30bp.
Trading volumes today are low with the Tokyo holiday overnight and no real data/auction focus from the eurozone so this could simply be a illiquidity based move.
We must keep in mind that the ECB came in with its forward guidance at the tail end of a sharp curve flattening on EONIA where the 12x24 had already rallied from its high above 60bp all the way to around 35bp on the day of the ECB meeting (see chart).
So while we are seeing the market dilute the forward guidance impact the ECB could still help to cement the prior EONIA curve flattening.
It is likely that 12x24 EONIA will trade around 35bp.
