Market alert: What to expect from the ECB meeting?

11:22 AM June 3, 2020
  • ECB set to increase bond purchase program
  • Investors want to hear comment on German court ruling
  • EURUSD, DE30 rally into the meeting

The ECB launched Pandemic Emergency Purchase Program earlier this year but the expectations are higher. These expectations are to be met at the Thursday’s meeting. What will the ECB do and how will this impact markets?

PEPP set to increase in size

The main expectation for the ECB is to increase the size of the bond purchase program under the PEPP acronym. The program has a cap of 750 billion euro and the markets see the ECB increasing this cap by 500 billion. This is seen as crucial for supporting government bond markets in the eurozone.   

Rates to remain unchanged

The ECB held negative deposit rates even before the pandemic and refrained from lowering them further. There are no expectations for such move as bond purchases are seen as more effective for maintaining low risk premiums across the eurozone. Rate cut would be very detrimental for the euro.

Will Lagarde comment on German court ruling?

German court ruling questioned some ECB bond purchases (but not under PEPP) and investors will want to hear from the ECB president if that has any implications for the monetary policy going forward. The market assumes that there will be no consequences.

Market impact

European markets have been gaining strongly and expectations of coordinated action (both fiscal and monetary) is an important factor. Normally, policy expansion is seen as negative for the currency but this time a failure to expand would be seen as a risk to the euro and obviously to the DE30 as well. Markets have discounted PEPP increase and expect the ECB to deliver it.

EURUSD is out of a downward trend and rising sharply on expectations of coordinated action in the EU. The resistance is seen around 1.14. Source: xStation5

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