The ECB apparently concluded that enough was enough and yesterday stepped up its verbal intervention campaign to correct overdone market expectations for a ECB depo rate hike adjustment. Following the news story in which unnamed ECB sources were quoted as saying that the message of the March press conference was “way overinterpreted” by markets the Bund future jumped 40 ticks, while the ECB dated EONIA forward curve bull flattened. The 10yr Bund yield eventually closed at 0.34%, near the middle of the 0.15%-0.50% range that we continue to foresee up until the second round of the French presidential elections. What is more, we still feel that the ECB dated EONIA forward for Dec-17, at -0.30%, is pricing in a too high probability of a 10bp depo rate hike.

Most notable hawk in the European Central Bank’s (ECB) governing council and the chief of German central bank Jens Weidmann maintained his sharp criticism of the ECB’s monetary policy as usual; however, he was ready to provide the assurance that the central bank would not end the quantitative easing program all of a sudden. In December last year, the European Central Bank (ECB) unveiled a fresh new package of stimulus which includes buying of debt below the ECB deposit rate which is currently at -0.4 percent, and additional bond purchases of €540 billion until December this year.

However, the recent sharp rise in both actual inflation and inflation expectations has led to the speculation that the ECB might end its stimulus by rolling back on its December commitments. Many in the market feared that such a move could disrupt the bond markets in the Eurozone and could lead to sharp rise in the interest rates. While Mr. Weidmann’s comments would ease some of those concerns, it is quite clear that the ECB is unlikely to dive further into easing and the very next action would be in the opposite but the question that remains is – how fast?