ECB meeting preview: EUR unlikely to reverse despite ECB easing plans
The ECB look to be lining up a fresh bout of stimulus, but what would it take for Lagarde to reverse the EUR/USD surge?
When and where?
The forthcoming European Central Bank (ECB) meeting will take place on Thursday 10 December. The rate decision will occur at 12.45pm (London time), with the press conference getting underway at 1.30pm.
Lagarde in line to recalibrate policies to help aid recovery
The forthcoming ECB meeting looks set to be a busy one, with the committee expected to shift restructure their current policy mix in a bid to help extend the current recovery. With restrictions seen throughout the region over the past month, the economic recovery is understandably unreliable despite the vaccine breakthroughs that took place last month.
Looking back to the October meeting, ECB President Christine Lagarde promised to 'recalibrate all of its instruments, as appropriate, to ensure that financing conditions remained favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path'. Part of that involves a likely addition of around €500 billion worth liquidity under the pandemic emergency purchase program (PEPP), taking the total to €1850 billion.
From a market perspective, the question is just how much an additional PEPP boost would move the dial, with much of the reaction likely to already be baked in. Previous examples of growth in the balance sheet has seen upside for the euro rather than the devaluation seen on previous occasions of monetary expansion. After all, the growth of the balance sheet has been a relative norm throughout this year, with the ECB trajectory looking very similar to the path seen under the Federal Rserve (Fed).
Any changes to the PEPP scheme are likely to be joined by a possible extension to the TLTRO programme. While the current operation ends on June 2021, it looks likely that time frame will be pushed back to the first quarter (Q1) of 2022.
Could EUR strength force a rate cut?
The decline in haven dollar demand and the Brexit-driven demise of the pound have seen a period of significant strength for the euro. From a business perspective this isn’t great news for the economic recovery. While Lagarde is likely to be aware of that risk, she is a very different person from her predecessor.
While Mario Draghi managed to talk down the euro on a monthly basis, we are yet to see a similarly effective approach from Lagarde. Nevertheless, it will be important to watch out for a potential commentary over an overvalued euro. From a policy standpoint, the kind of shock needed to move the dial for the euro would be a interest rate cut. The 22% market expectation for a 10-basis point cut in the deposit rate does highlight the fact that this is a possibility.
Where now for the euro?
EUR/USD has seen sharp gains over the course of the past month, with the vaccine breakthroughs seen throughout November bringing about a fresh bout of weakness for the dollar. This has taken the pair into the highest level since April 2017. The recent consolidation marks a likely breather within this trend, with further gains looking likely.
The use of the standard deviation channel highlights how a short-term move lower would simply bring us back into an area of value. Support would come in the form of the prior high of $1.2011 alongside the channel bottom. As such, further upside does seem likely over the medium-term, with short-term downside unlikely to reverse the trend.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
Be ready to act on ECB opportunities
Learn how the ECB’s monetary policy announcements affect interest rates and price stability ahead of its next meeting in September 2020.
- How might the next meeting affect the markets?
- What are the key rate decisions to watch?
- Why is the Governing Council announcement important for traders?
Live prices on most popular markets
You might be interested in…
Find out what charges your trades could incur with our transparent fee structure.
Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.
Stay on top of upcoming market-moving events with our customisable economic calendar.