March 10 Will Be a Landmark Day for Markets

(Bloomberg) — This year has already had its fair share of huge days for markets, but the biggest may be yet to come: March 10. That’s when the next datapoint on U.S. inflation is due and the European Central Bank meets.

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Just as ECB President Christine Lagarde is starting her press conference, U.S. consumer prices data for February will be released, meaning that two key event risks for the euro will unfold simultaneously. One-month volatility in the common currency reflects this and is trading near a one-year high.

January’s CPI data, released yesterday, sparked big moves across global markets after it showed the fastest rate of inflation in the U.S. in four decades. Money markets are now pricing in seven Federal Reserve rate hikes this year, with the question of a half percentage-point move in March now investors’ main focus.

One-month volatility is now above 7%, touching the highest level since the emergence of the omicron coronavirus variant was roiling markets in early December. The relative premium on the tenor — the difference between implied and realized volatility — stands at just 10 basis points, suggesting options are only modestly overpriced.

Whether the premium to own euro exposure ahead of March 10 increases may be down to signals by policy makers in coming weeks.

Investors are positioning for a hawkish shift by the ECB next month, resulting in wider spreads between German and Italian yields. Still, the meeting is very much a live one. Lagarde said this week that rushing to tighten could harm the rebound from the pandemic. At the same time, doubts over the institution’s inflation forecasting are growing among policy makers, meaning the start of the tightening cycle could be sooner than expected.

As for the Fed, St. Louis Fed President and voter James Bullard said Thursday that he favors three hikes by July, with one of them being a half-point move. But centrists among top Fed officials see little need to start a hiking cycle with an aggressive move. The next scheduled policy decision by the FOMC is due March 16.

And it won’t be just higher volatility that is at stake. The euro’s resilience may be tested as policy makers prepare the market for their next moves. The common currency is now trading near the $1.14 handle, even as the two-year U.S.-Germany interest rate spread has widened to a fresh two-year high.

Options traders still see upside for the currency in the short-term, but bullish bets are losing some traction. One-month risk reversals, a barometer of market positioning and sentiment, trade at 12 basis points in favor of euro calls, which compares to a reading of 28 basis points on Feb. 4.