ECB Preview: Will it Be Positive For The Euro?

Markets are not expecting much from Thursday’s ECB meeting, but it could be positive for the EUR/USD. In December, the European Central Bank laid out plans for 2022, most notably ending the PEPP.

The ECB is widely expected to leave its policy settings unchanged following the January policy meeting. In December.

To soften the policy transition, the ECB announced that it would increase the monthly purchases under the Asset Purchase Programme (APP) to €40 billion in Q2 and €30 billion in Q3 from the current level of €20 billion. The bank intends to maintain the APP purchases at a pace of €20 billion for “as long as necessary” from the last quarter of the year.

Rather than fall from 5.0% to 4.4% as analysts expected, it rose to 5.1%, a new high. The monthly increase was 0.3%. The market looked for a 0.4% decline.

More importantly, core inflation, the ECB’s preferred measure of inflation, decelerated to 2.3% from 2.6% in December. Expectations were for Core CPI to decelerate to 1.9%. These higher inflation figures come as big shock as the expectation for a bigger fall. Although the Euro traded higher on the headline, the swaps market has already turned relatively hawkish on the ECB. It was already pricing 35 bp of higher rates over the next 12 months. And the first hike is fully discounted by late Q3 or early Q4. The ECB meets tomorrow.

If Lagarde hints at a possible rate hike before the end of the year after the recent inflation figures, this could be seen as a hawkish ECB providing some support to the Euro. Markets are now pricing in a 30 basis point hike by the end of the year.

On the other hand, Lagarde argues that inflation is nearing a peak in the eurozone and hints that rates will not be raised in 2022; it will be against rate hike expectations. As a result, Lagarde may indicate that she does not need to normalize policy as quickly as the Fed.

In general, the markets do not expect a shift in the tone of the European Central Bank.

EUR/USD briefly recaptured 1.1300 on unexpectedly hotter Eurozone inflation. The spot is currently adding 0.27% on the day, trading at 1.1299.