Will Draghi and the ECB close the tap on QE today?
That is the ultimate question, isn't it? But is that the most important one? That remains up for debate even as we approach the final minutes before the meeting. Regardless, if the announcement to end QE won't come today, it will come in July. The only difference is that the market will encounter a bit of a setback in the immediate reaction to the decision later.
So, what else is there to focus on? Draghi's press conference will of course be the ultimate deal breaker at the end of the day. But the other thing to look out for will be the ECB's updated economic projections.
To gauge that, we have to look at what has changed over the last few months in the Eurozone. First, activity data in Q2 continues to struggle - but seeing how the ECB has brushed Q1's soft patch aside I expect more of the same from Draghi this time around. Hence, GDP forecasts should remain unchanged at the very most - they definitely can't be revised upwards. This will either be a +1 for the doves or it will be neutral at best if Draghi sidesteps this issue.
Second, inflation data has rebounded in May - following the distorted April reading - and seeing how ECB officials have talked up the inflation rhetoric prior to the meeting, expectation is for an upwards adjustment to the inflation forecast. That's +1 for the hawks. And if Draghi provides a more upbeat outlook in his presser, it's another point to add to the scoreboard.
Third, labour market data continues to be deliver solid signals of tightening. And that will give Draghi a lot of ease and comfort to point to the data and say that things are moving in the right path. This will be another +1 for the hawks.
The final issue will be that of Italy. Is the ECB concerned about the situation there and how will they react? I expect Draghi to pull out the oldest trick in the book and say that the central bank doesn't have the capacity nor the mandate to be involved in political developments in the region. That will be his best move to sidestep the question. I would regard this as more of a neutral.
The scoreboard points to a more hawkish tone, but ultimately it will depend on the first question which is if the ECB will announce the end of QE in this meeting.
If they do, the statement won't offer much and all the details on the tapering will be handed to Draghi and I expect him to layer it with a bunch of caveats and conditions - as well as continuing to reiterate a cautious approach moving forward. That is a very big +1 for the doves.
And if they don't, I expect Draghi not to give away much details on a decision to announce it in July. In that case, this meeting will be a "yes, we updated our forecasts to be more hawkish but you can ask us about QE again next month". This is the scenario I believe that will transpire later. And this is another +1 for the doves as well.
