LONDON May 3 Money markets stuck to expectations of a rate cut this year after the European Central Bank on Thursday neither signalled further monetary easing nor eliminate the possibility of more stimulus.
At a press conference in Spain, Draghi painted an uncertain picture of the euro zone's economy, saying while it was likely to improve this year there were risks of a decline. He said more time was needed to see the impact of cheap 3-year financing on the real economy and that any exit strategy remained premature.
Euribor futures gave up gains after the comments, as traders took profit on previously held positions. But by late trade, they had come off their lows as some bought back into the dips.
"They kept their options opened but they didn't give really any indication, and they don't appear to be in any hurry to change policy," Nikolaos Panigirtzoglou, strategist at JPMorgan said.
Data this week painted a bleak picture of the manufacturing sector in the euro zone, while double-digit unemployment fueled concerns that austerity in Europe was choking an already sluggish economy.
Euribor interest rate futures fell as much as 3.5 ticks across the 2013 and 2014 strip after Draghi's comments having traded as much as 2 ticks higher when the press conference started.
By late trade, Euribor futures had come off their lows although they were still 0.005 to 2 bps lower on the day.
Alessandro Giansanti, strategist at ING said, said the June contract was pricing in a close to fifty percent chance of a 25 basis point that month, little changed compared to before the press conference.
One trader said the worsening economic situation in the euro zone had money markets players betting on more monetary easing from the ECB, be it via a cut in interest rates, in the deposit facility rate or by increasing the maturity on long-term refinancing operations.
The ECB injected one trillion euros worth of cheap 3-year cash in December and February, providing highly indebted countries with some breathing space as the excess liquidity helped limit a rise in peripheral bond yields.
"The reaction was fairly predictable in that people are happy to be long of Euribor futures and as a result, because nothing happened today, the pull-back was bought quite quickly," said the trader.
"Today's press conference probably didn't surprise us in that nothing happened in terms of changing the monetary stance, but they certainly didn't close any doors."
Eonia forwards were suggesting that the overnight rate be at 0.29-0.24 by November compared to 0.34 percent currently. The trader said that suggested a 30 percent chance of a 25 bps interest rate cut by that time.
But Panigirtzoglou said the Eonia rate also indicated the high probability of a cut in the rate of the deposit facility currently priced in by the market, little changed from before the press conference.
"I think the expectation for an ECB cut and a cut in the deposit facility will stay for as long as there is funding stress and the economic headwinds remain as intense as they are," Panigirtzoglou added.