The ECB has three main tools that they use for their monetary policy mandate which has recently shifted emphasis a little. Here is what we need to know.

ECB strategic review

This policy review meant that the ECB dropped their ‘close to, but below 2%’ inflation target. It is now at 2% with tolerance for temporary spikes above. This has led some to speculate that the ECB might need to be more accommodative to try and hit this target.

The three monetary policy tools

1. Interest rates.

These are expected to remain unchanged at current levels.

2. Pandemic emergency fund (PEPP).

This is due to run out in March 2022, with a €1,850 billion envelope.

3. Regular eurozone support via the APP.

This is set at €20 billion per month and is the general support for the eurozone.

The stage

Expectations have been increased for the meeting by Christine Lagarde who has hinted that the PEE (emergency) program could change into something else (could it be morphed into the APP program?). This has increased dovish expectations for the meeting.

A disagreement

On Friday a sources report stated that the ECB is in disagreement on stimulus guidance for the 22nd July meeting. Apparently, the talks were heated and the talks of bond purchases will not happen until September.

So, the takeaway is that there could be some kind of dovish shift from the ECB this meeting. So, it is worth watching out for. Remember to watch the EUR reaction carefully as sometimes the extra stimulus can boost the EUR even though the typical reaction of extra bond purchases is to weaken a currency. So, just watch out for that dynamic on EUR pairs. The EURUSD is sitting on a key trend line, so watch this area for a potential break lower if the ECB does make a dovish policy shift on Thursday.


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