We have been getting questions about exactly what's priced in for the ECB and it's not as straight-forward as it might seem. The euro dipped back to 1.1000 on Wednesday ahead of the decision and eurozone bond yields ticked lower. Along with the ECB decision also comes a key US CPI report. A new Premium trade has just been issued with 2 supporting charts & detailed notes. 

There are five main moving parts to the ECB decision and that's what makes it so tricky. Let's break them down one-by-one.

 

1) Deposit rate

The headlines from the decision will be what happened to deposit rate, which is currently at -0.40%. The consensus is a 0.10% cut to -0.50% but it's far from assured. The OIS market is pricing in 14 bps of easing, which equates to a 40% chance of a 20 bps cut.

 

2) QE

This is a major wild card. The consensus of economists is for a new 30 billion per month bond buying program. However as series of speakers and 'sources' reports – including one last week from MNI – suggest that bond buys may be reserved in case of deeper economic problems. If that's the case, it might be signaled for October but the market reaction will depend on how clear that signal is.

 

3) Forward guidance

The current guidance from the ECB is to keep rates at or below current levels at least through H1 2020. The consensus is for something like 'through mid-2020' but policymakers may find it easy to push that even further, especially if QE is left out.

 

4) Tiering

Eurozone banks are struggling and one of the reasons why is that negative deposit rates and a flat yield curve crush net-interest margins. Tiering (expempting banks with particular reserves from negative rates) could alleviate the problem but it could also complicate it, creating winners and losers among banks. On Wednesday, Dutch parliament passed a motion against tiering in a sign of how difficult it will be to find a consensus. Economists expect some help for banks here but it's a wild card.

 

5) Verbal guidance

Even with all the moving mechanical parts, the press conference may be what determines the market reaction. Both the market and the central bank are pivoting towards a reliance on fiscal policy for euro direction. Draghi has emphasized this point since he started as President but we're fast approaching the time when the ECB is tapped out. Draghi may choose this moment to draw a line in the sand and say to governments with a more forceful tone that it's time to step up.

With all these considerations, handicapping the euro is difficult. Ultimately, we think right now that growth matters far more than the level of rates or miniscule changes in policy. The framework for viewing the decision may ultimately come down to how much confidence the central bank inspires that it can generate growth itself, or prod governments into doing more.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD drops below 1.11 amid upbeat US data, trade concerns

EUR/USD is trading below 1.11 after robust US housing figures and solid consumer sentiment figures were published. Earlier, the common currency suffered from the concerns of new US tariffs on the EU.

EUR/USD News

GBP/USD down 100 pips after UK retail sales badly disappoint, amid USD strength

GBP/USD has plunged below 1.3050 after UK retail sales badly disappointed with a fall of 0.6% in December, on top of downward revisions. Odds of a BOE cut have risen.

GBP/USD News

Crypto market hyperspace mode On

The secondary actors of the crypto-sphere awaken and rally hard. Leading coins battle with greater resistance at the gates of a full bullish market. The only risk is an over-shoot, but that sentiment remains neutral.

Read more

Gold looks to close week flat below $1560

The XAU/USD pair climbed to a fresh daily high of $1560 in the early trading hours of the American session but struggled to preserve its momentum.

Gold News

USD/JPY: Losing bullish momentum but retaining gains

Chinese encouraging data kept markets in risk-on mode at the beginning of the day. The US January Michigan Consumer Sentiment Index is seen at 99.3, matching December figure. USD/JPY holding at the upper end of its weekly range could correct lower.

USD/JPY News

Forex Majors

Cryptocurrencies

Signatures