ECB look-ahead

Even as they continue to digest the fall-out from last night’s Fed meeting, traders now to the European Central Bank (ECB). While no one expects any overt changes in monetary policy, expectations have risen that the ECB will finally produce a timetable for winding down its €30 billion per month Asset Purchase Programme (APP). The current feeling is that it is preparing wind down and end APP by the end of this year and that the Governing Council will produce a timetable at this meeting. There’s still a possibility that taper details are held back until next month which would be the last opportunity before the APP in its current form ends in September. But the ECB’s Chief Economist Peter Praet (one of the more dovish members of the bank's Governing Council) has already said he expects the APP wind-down to be discussed at this week’s meeting, raising investor expectations.

Another argument in favour of taper details being released today is the recent spike in inflation. At the end of last month Flash Eurozone May HICP inflation jumped to 1.9% year-on-year from 1.2% in April, overshooting the consensus forecast of a 1.6% increase. This means inflation has finally reached the ECB’s target and it is expected to trend higher over the coming months. 

There are also voices within the ECB’s Governing Council, led by Bundesbank chief Jens Weidmann, pushing for the central bank to bring its current loose monetary policy to an end. Not only is there a message to send to the markets, but also technical constraints in terms of the both the size and composition of ECB’s balance sheet as well as the diminishing availability of qualifying financial assets for the ECB to buy.

However, it’s worth noting that an end to the ECB’s APP won’t be positive for Italy and is likely to put further pressure on Italian bonds. So, it could be that Mario Draghi pushes back against the hawks and delays delivering taper details in the hope that the political situation in Italy continues to calm down. Alternatively, or additionally, Mr Draghi could temper any announcement by maintaining a dovish stance in his press conference. All-in-all, we could be in for some wild swings in the euro later today.