eFX have dug through Morgan Stanley's work on the Draghi ECB decision and its impact on EUR

Some great stuff in here, much food for though as we approach the FOMC

Draghi disappointed markets today as the ECB eased but not enough to meet elevated market expectations, says Morgan Stanley.

"Yes he cut the deposit rate by 10bps and extended the APP by six months to at least March 2017 as we expected. But against our forecasts, Draghi did not explicitly commit to boosting the monthly pace of QE purchases. Nor did he hint at more cuts to come in the depo rate. Markets were looking for 14bps of cuts in the depo and looking for at least a 10-15bn increase in monthly QE purchases. Decisions to reinvest principal payments of bonds, expanding purchases to include local debt and an extension of MROs until end 2017 were not enough to compensate for relative inaction on the bigger items," MS notes.

Why did he not do more? "Draghi sounded relatively upbeat on eurozone growth outlook in both the statement and in his Q&A. This was reflected in the staff projections, which were mostly unchanged. In the Q&A in particular, Draghi mentioned specifically that he believes today's actions are adequate in helping the eurozone to reach its goal. Said differently, Draghi has told us that it would take a further deterioration in the growth/inflation outlook for the ECB to do more," MS adds.

"We think risks are now skewed higher in EURUSD into the FOMC, given the buildup in short positioning we've seen over the last month and no signs of additional ECB stimulus nearterm. But we would reload USD longs ahead of the FOMC meeting. As we discussed in last week's Pulse, the 'dovish hike' has become very consensus and the biggest risk to this view is an FOMC that fails to bring down the dots for 2016. Moreover, aggressively dovish changes to the statement may be difficult to reconcile with a data dependent approach," MS advises.

"Indeed, over the medium term we remain EUR bears. Draghi was explicit that 2016 and 2017 inflation would be half a percent and a third of a percent lower respectively in the absence of ECB stimulus. Clearly he believes in the power of monetary policy, and disappointments in growth and inflation, particularly if financial conditions (European yields in particular) tighten following today's meeting would ultimately lead to further easing. Today's further cut of interest rates into negative territory will only encourage the EUR's transition from asset to funding currency," MS argues.