What to expect ahead of the ECB policy decision later?
The big question for the ECB later today is whether or not they are going to take a more proactive approach in addressing the needs and nervousness in the market amid the ongoing economic fallout from the coronavirus outbreak.
In that regard, all eyes will fall upon the central bank's decision on its PEPP stimulus measure - which is expected to run out by September - and if they are going to communicate an expansion to the size and duration (currently to run until the year end).
So, let's take a look at some of the areas to focus on and potential surprises.
PEPP
This is obviously the first thing to look at for any market reaction. Expectation is for the central bank to at least increase PEPP by €500 billion, which is likely to take the stimulus measure into next year.
In that sense, it creates some lopsided risks as if they don't deliver on this - and choose to wait until July - then it will surely add to more anxiety and nervousness in BTPs and the bond yields spread, which in turn should translate to a softer euro as well.
The central bank may also just get away with a €250 billion commitment but it isn't likely to inspire much confidence as the market wants to be reassured of the ECB's commitment to the economic recovery in the euro area.
Macroeconomic projections
The ECB will also be releasing its latest macroeconomic projections, after having ruled out its previously 'mild' forecast with Lagarde saying they expect the base case to sit somewhere between the 'medium' and 'severe' scenario i.e. GDP slump of between 8% to 12%.
In that sense, a downgrade is expected to the balance of risks and economic forecasts but at the end of the day, Lagarde's communication and language when presenting the outlook and the governing council's view will matter more.
More buying?
A potential surprise area is that the ECB could include fallen angels in their asset purchases, after having already loosened the collateral guidelines on this matter in April.
The decision here will come with risks from a legal and risk-management standpoint but essentially this will be a good boost to the likes of Italy and that may give some added support to the euro as well should they deliver on the PEPP front.
Language and forward guidance
This is still ultimately one of the more powerful tools that the ECB could play around with and this will boil down to Lagarde's press conference for the most part.
However, considering that we are still in the midst of dealing with the economic fallout and the risk of financial conditions tightening again, they should play it safe and offer a very similar guidance to what we saw back in April.
The commitment to keep stimulus measures for as long as required/needed will be the key sentence to hammer home the point above.
Other potential surprises?
There may not be much room to tweak around for the ECB in terms of other surprises, but if anything they could adjust the current rate tiering in order to free up more liquidity into the financial system if need be. They aren't expected to but you can understand why they may choose to do so in order to help banks a little more during this time.
You can check out our other posts on this from earlier below:
