What to expect before the ECB policy decision later?
The big question for the ECB later today is whether it will take a more proactive approach to meet market needs and nervousness amid the ongoing economic fallout from the coronavirus epidemic.
In this regard, all eyes will turn to the central bank’s decision on its PEPP stimulus measure – which should be completed by September – and whether they will communicate an expansion in size and duration (currently ongoing until the end of the year). ).
So let’s take a look at some of the areas to focus on and the potential surprises.
This is obviously the first thing to consider for any market reaction. The central bank is expected to increase at least the PEPP by 500 billion euros, which should trigger the stimulus next year.
In this sense, it creates unbalanced risks as if they did not respect this – and chose to wait until July – then it would surely add to more anxiety and nervousness in the BTP and the spread of bond yields, which in turn should translate into a soft euro too.
The central bank could also get away with a commitment of 250 billion euros, but that should not inspire much confidence, because the market wants to be reassured about the commitment of the ECB in favor of economic recovery in the euro zone.
In this sense, a downward revision is expected for the balance of risks and economic forecasts, but ultimately, the communication and the language of Lagarde when presenting the outlook and the opinion of the Board of Governors will have more importance.
The decision made here will entail risks from a legal and risk management point of view, but it will essentially be a good boost for Italy and it could also provide additional support for the euro if they were to hold the blow on the forehead of the PEPP.
Language and orientation
It is still ultimately one of the most powerful tools the ECB could play with and it will come down to the Lagarde press conference for the most part.
However, given that we are still dealing with the economic fallout and the risk of tightening financial conditions, they should be cautious and offer directions very similar to what we saw in April.
The commitment to maintain stimulus for as long as necessary / necessary will be the key phrase to hammer the point above.
Any other potential surprises?
There may not be much room for maneuver for the ECB in terms of other surprises, but on the contrary, they could adjust the current level of rates in order to free up more liquidity in the financial system if necessary. They’re not supposed to do it, but you can understand why they can choose to do it in order to help the banks a little more during this time.
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