ECB Meeting Preview - More Stimulus in December?

The ECB is not expected to make any immediate to changes to monetary policy this week, although the Euro has been skidding lower across the week in anticipation of a dovish meeting.

Charts (2)

Thursday 29th October, Decision announced 12:45 GMT, with a press conference 45 minutes later.

The ECB is not expected to make any immediate to changes to monetary policy this week, with both the deposit and main refinancing rates expected to remain unchanged. The Euro has been skidding lower across the week in anticipation of a dovish meeting

Deteriorating scene
The picture has deteriorated since the last ECB meeting in September. Covid cases have continued to surge with France recording over 33,000 new daily infections and Germany a record 11,000. Both key economies in the eurozone are on the brink of announcing national lockdown measures after localised restrictions have failed to stem the spread of a second wave covid. Business activity in the bloc, is according to the latest PMI data, now in contraction territory, whilst the service sector has contracted further. 

No change expected (yet)
The broad expectation that this week is too soon for the ECB to act. Instead the ECB are expected to open the door to additional stimulus in December’s meeting. The central bank are expected to highlight the very significant downside risk that the second wave poses and that policy will need to remain accommodative in order to cushion the bloc’s economy from this risk. Christine Lagarde could well then indicate to the market that the ECB is prepared to act as soon as the next meeting. Remember December’s meeting will also see the updated staff projections released. The ECB could well look to expand the PEPP beyond its current end date of mid-2021 and add a further €500 billion.
However, it is worth keeping in mind that new lockdowns by the Euro’s biggest economies are boosting that chances of a pre-emptive stimulus boost. Whilst there is no rush to act immediately is could certainly send a strong message.

Euro strength & inflation
Well it was never really an issue for Christine Lagarde anyway. Whilst Euro strength had been a focus in previous month for some policy maker we expect it to slip off agenda this month, as the Euro has lost ground versus the US Dollar.
Inflation and the lack thereof is likely to be a more pressing concern for the ECB. The ECB’s September projections indicated a mild downtrend to inflation. There is a good chance that the inflation forecast will need to be downwardly revised again in December adding yet more pressure on the central bank to act.

EUR/JPY hits 3 month low

The market will be disappointed if it doesn’t get a clear hint of more action coming. The Euro has been under significant pressure this week ahead of the ECB meeting. Meanwhile the safe haven Japanese Yen has been in favour in risk off trading, with the pair striking a multi month low of 122.18. 
The pair trades below 50 & 100 sma on daily chart but remains above 200 which offers support at 121.17

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