Nordea outlines three scenarios for the European Central Bank (ECB) meeting, each with different implications for interest rate expectations and market behavior. The bank's baseline scenario is that the ECB will leave rates unchanged while maintaining a tightening bias.

Key Scenarios:

1. Hawkish with Tightening Bias Intact: In this least likely scenario, the ECB would hike rates and keep its tightening bias intact. This would durably boost interest rate expectations and likely be seen as a hawkish move by the market.

2. Softened Tightening Bias with 25bp Hike: In this situation, the ECB would raise rates by 25 basis points but signal that the bar for further rate hikes has been raised. This would likely provide only a temporary boost to interest rate expectations.

3. Hawkish Hold: Nordea's baseline scenario sees the ECB leaving rates unchanged while retaining its tightening bias. This would be perceived as a hawkish hold, likely putting some downward pressure on interest rate expectations.

Trading Recommendations:

• Scenario 1: If the ECB goes for a hawkish move, traders might consider long positions on the euro and short-term European bonds.

• Scenario 2: In the case of a 25bp rate hike with softened expectations for future hikes, traders might consider short positions as the initial excitement dies down.

• Scenario 3: If the ECB holds rates while maintaining a tightening bias, traders might see an opportunity for downside trades given the downward pressure on rate expectations.

Implications:

For Traders:

• Volatility: Depending on which scenario unfolds, traders could see varying degrees of market volatility.

For Policymakers:

• Policy Outlook: The reaction of interest rate expectations to the ECB's decision will have implications for policymakers' future options.

Conclusion:

Nordea provides a nuanced outlook on the possible outcomes of the ECB meeting, each with its own set of implications for market behavior and policy direction. The bank's baseline scenario is a hawkish hold, which they believe would put some downward pressure on rate expectations. Traders and policymakers should be prepared for different scenarios to make informed decisions.