Euro money market waiting for the ECB meeting

 Money markets will be focused not only on the ECB’s decision in March on the depo rate but also on any suggestion of further actions later in the year, given the current expectation of a cumulative 25-30bp cuts by year-end. 

As we the ECB will probabily try avoiding the same disappointment as in December, we see risks as skewed towards a further rally of the 1y1y Eonia fwd and gradual flattening of the Eonia curve. 

Despite the recent tightening, we still see a widening bias on Fra/Eonia spreads.
The eurosystem liquidity surplus has dropped by about €35bn since the beginning of February, mainly because of the increase in some components of autonomous factors that has more than offset the net liquidity injection from QE purchases. 

Despite that, the Eonia fixing has crept down to the current (historically low) level of -24.9bp (depo rate +5.1bp). The move has been accompanied by a gradual increase in Eonia volume (from €10bn at the beginning of February to the current €17bn).

This supports our view that, in the context of abundant liquidity, the changes in Eonia volumes are the main driver of the fixing, with the depo rate setting the floor.

Extract from a report from Giuseppe Maraffino, Barclays UK