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Tomorrow, at 1245BST, we get the result of the latest ECB rate decision, followed by the usual press conference with ECB President Lagarde. Updates economic projections will also be released at this meeting.
With analysts split as to what might be the eventual outcome of this one, things could get interesting and we could see some pretty spectacular EUR volatility.
One the one hand, some analysts expect that the ECB might deliver us a dovish surprise, perhaps be increasing the PEPP further (the pandemic emergency purchase programme was increased EUR 600bln to total EUR 1.35trln back in June) or even cutting rates.
They argue that with the European economic outlook darkening (August PMI and July Retail Sales data was bad, August CPI data was shocking) amid rising Covid-19 cases, which is unlikely to slow as we head into winter (people spending more time the less well ventilated indoors), the ECB ought to get ahead and act now.
Market measures of inflation expectations certainly don’t suggest that current ECB policy is credibly going to be able to get inflation back to their just under 2% target in the coming years, so a strong argument for powerful ECB intervention can certainly be made.
Another argument being made is that, amid recent “jawboning” from ECB members (Chief Economist Lane recent talked about how EURUSD matters and other members expressed concern to the FT about the effects of EUR strength on exports and inflation and hinted a downward revision to inflation projections might be coming).
In sum, more stimulus is not going to get through at tomorrow’s meeting without a fight from the hawks.
Therefore, ECB President Lagarde (who likes to think of herself as a unifier at the ECB, in contrast to the divisive previous President Draghi), might strike more of a middle ground.
That means she will likely be able to get away with further jawboning about EUR strength, and even some dovish tweaks to the statement given the worsening economic outlook, but might not want to go all in with decisive dovish action at this meeting.
If this was the case, the EUR reaction might be muted (i.e. EURUSD still close to 1.1800).
Conversely, if the ECB does surprise us with more concrete easing measures, expect EURUSD to slump below 1.1800. If the statement is not suitably dovish and the tweaks to the ECB’s economic projections less dovish than expected, we could see EURUSD reclaim the 1.1900 handle.
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