There will be no change in headline rates from the ECB tomorrow but there could well be a shift in the terms in which the ECB offers funding to banks on a long-term basis. Dealers will listen closely to hear if the ECB announces that it will add a spread to the 1% refi rate , if they index the rate, or make it floating. Any one of those options, if used, would be a tightening in their super-loose policy. They have been laying the ground work for such a shift, and it is just a matter of time before they begin to slowly exit. If not this month, traders will expect a move to come in the next few months ahead.
What is fully expected is for the ECB to end the 1-year refinancing after the December auction and reduce the number of three-month tenders.
For EUR/USD, we may get a knee-jerk rally on a change in the refi terms but I would not expect a big, sustained rally to new highs on such a move alone. As Medley said this morning, they will remain dovish, on balance.
