Danske Research Team
Danske Bank A/S
The ECB meeting on Thursday next week will focus on the financing conditions, PEPP implementation, and cautiously optimistic view on-demand amid a weak CPI outlook. ECB is expected to raise its growth projections by 0.3pp for this year and next year.
We expect ECB’s PEPP purchase guidance to shift from ‘significantly’ to ‘moderately’ higher than at the start of the year, i.e. we expect PEPP buying to be EUR70bn/ month in Q3 versus the current net purchase pace of EUR80bn/month.
We do not expect the meeting will alter our tactical nor strategic view on the rates (range trading & spread compression) outlook or FX (strategically stronger USD).
A balancing act – normalizing, and keeping flexibility
It will be a challenging communication exercise that awaits Lagarde on Thursday next week. We expect that she and the ECB GC will convey a narrative of higher growth, with a still subdued inflation outlook yet at the same time also slow the current PEPP purchases slightly. At the current juncture, we believe it is fair to argue both for a lower but also unchanged PEPP net purchase pace given that we are still in the early phase of re-opening the European economies. Stournaras, Panetta, and Villeroy indicated a preference to not taper PEPP purchases while Schnabel and Kazaks have fallen short of endorsing a similar conclusion.
Our preferred measures of ECB financing conditions - what to watch - updated, 21 May, are not concerning to a significant degree which also seems to be shared among various GC members. However, while financial markets have been broadly stable since the March ECB meeting, concerns about the tighter credit conditions (as also reflected in the April bank lending survey) and the risks thereof must be of concern.
We, therefore, expect a compromise on PEPP between going back to the Jan/Feb purchase pace (around EUR60bn/month) and keeping the current pace (around EUR80bn/month) to land around EUR70bn/month in Q3, but 15-20% lower in August due to seasonality, with the strengthening of the flexibility of the PEPP.
Transferring PEPP to APP? Not yet
While market speculation has picked up on transferring PEPP modalities to the APP from March 2022 where the net PEPP purchases is currently expected to end, we do not expect such discussion to take place until the fall of this year. Furthermore, as the PEPP is designed to address the COVID-impaired inflation and growth shortfall and PEPP's direct link to financing conditions, we do not take it as given that this will happen.
We believe that such discussions will be done on a bigger review and overall calibration of the instruments later this year, where we also expect TLTRO and tiering will be discussed.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
AUD/USD holds losses near 0.6450 amid Australian politics; RBA eyed
AUD/USD keeps the red near 0.6450 in the Asian session on Tuesday as traders opt to wait for the RBA decision before placing fresh directional bets. A modest US Dollar uptick and Australian political drama undermine the Aussie even as the PBOC delivered the expected 10 bps Loan Prime Rate cuts.
USD/JPY drops back below 145.00 on likely Japan-US FX talks
USD/JPY has come under intense selling pressure and gives up 145.00 in the Asian session on Tuesday. The pair fades the upswing after Japan's Finance Minister Kato hinted at holding FX talks with US Treasury Secretary Bessent, which lifted the Japanese Yen.
Gold price struggle with $3,250 extends, what’s next?
Gold price has returned to red early Tuesday, having failed to take out the $3,250 barrier once again. The downtick in Gold price could be linked to a tepid US Dollar recovery as traders await US trade talks and Fedspeak for a fresh directional impetus.
Solana set for a consensus switch with the introduction of Alpenglow
Solana (SOL) showed signs of recovery in the American trading session on Monday following the introduction of a new consensus protocol, Alpenglow, which would replace the network's current Proof-of-History and TowerBFT mechanisms.
China April slowdown shows the impact of economic uncertainty
Trade war uncertainty is denting Chinese confidence, resulting in slower economic activity in April. Retail sales and fixed-asset investment both underperformed forecasts amid heightened caution. Yet the impact on manufacturing was less than feared.
The Best brokers to trade EUR/USD
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.