A quick guide to today's ECB meeting

Later today the ECB will announce its latest decision on interest rates. The market expects no change in rates or policy measures after it took significant steps to ease policy at its June meeting. Instead the focus may shift to ECB President Draghi’s press conference at 1330 BST/ 0830 ET.

The key points for this meeting include

• Is the ECB content that they have done enough to boost the Eurozone economy?

• What are their thoughts on inflation staying at 0.5% last month?

• How is the working group that were tasked to investigate ABS purchases getting on? Should we expect QE in the future?

• Draghi hinted that rates would not rise until the expiry of TLTRO funds. This is 2018, right now the market expects the first rate increase in 2017, does the market need to re-price the timing of the ECB’s first rate hike?

• Is the ECB concerned about the EUR?

Since the June meeting, one way to determine if the ECB needs to take more action is by looking at the uptake of the targeted long-term refinancing operations (TLTROs – basically cheap loans for banks). If banks choose not to take up these loans, and they are not mandatory, then the ECB may need to find another way to stimulate lending, potentially QE.

Right now, there is not enough data to determine if banks have been using these loans, however this could be the key data point to watch going forward. So far banks in the Eurozone have drawn EUR 581 bn, from LTRO loans offered in 2011 and 2012, and have paid back EUR 373bn. Interestingly; the ECB’s balance sheet shrunk further in June to its lowest level since 2011 suggesting that early uptake of TLTRO loans has been weak. We will be looking to see if banks draw more on ECB cheap loans in the coming weeks and months, if they don’t then the ECB may have no choice but to take more accommodative action in the coming months.

Did the ECB shoot itself in its own foot?

Some have argued that TLTRO loans could be unattractive for the banks because they are too expensive. Banks will be charged a 10 basis point fee over the ECB’s main interest rate for 4-year funds. But if rates are expected to remain at current levels or lower until 2018, then why would banks pay the 10 basis point fee?

This matter needs clearing up, and we expect Draghi to address it at today’s meeting, if he doesn’t then the market may start to challenge the ECB’s commitment to its new measures to loosen monetary policy, which could result in a stronger EUR.

How to weaken the Teflon EUR:

The EUR may have moderated in the last couple of days, but it is still back at the level it was ahead of last month’s ECB meeting. The measures introduced by the ECB have yet to have an impact on the currency, thus if Draghi wants to see a weaker EUR today he may have to 1, unleash his powerful rhetoric and hope it can weigh on the single currency, as it has done in the past, and 2, reinforce the power of the TLTRO funds and the ECB’s optimism that European banks will draw on these funds.

Until the ECB’s balance sheet starts to rise, it will be hard for the EURUSD to decline in a meaningful way. However, Draghi is the master of rhetoric, and knows that a weaker EUR could help fuel inflation in the currency bloc. Thus, Draghi may use today’s meeting to try and talk down the EUR.

EURUSD: the technical view

The EUR sold off after failing to stay above key resistance between 1.3676 and 1.3682 – the 200-day and 50-day smas, respectively – momentum indicators have fallen short of the zero line on the daily MACD, which suggests that the market is on hold and will wait for direction from Draghi later today. If he does manage to talk down the single currency then key support levels include: 1.3576 – the June 26 low, then 1.3477 – the low from 3rd February. On the upside, a break above 1.3690, the 38.2% Fib retracement of the May – June sell off, could see another attempt at a recovery back to 1.3806 – the 61.8% retracement of the same decline. It’s in Draghi’s hands…