The ECB meets later today but it comes at a testing time for the market
With Germany and France announcing revamped lockdown measures yesterday, that saw European equities plunge to multi-month lows but the euro held its ground for the most part with EUR/USD nudged lower but not challenging 1.1700.
The tighter restrictions will last through until the end of November and weigh on the economic prospects of the Eurozone in Q4. The question now goes back to the ECB, is this the time to reign in more support for the economy? Or can they afford to wait still?
Honestly, given the sudden change in developments, one cannot rule out the ECB from taking more urgent action today. But against the backdrop of the US election, they may be less inclined to do so in fear of seeing any decision getting lost in the shuffle.
That said, the market has been expecting the central bank to really only move in December and with there still being capacity in its PEPP stimulus, they can announce any expansion of the program next month instead - which is what I would expect.
Such a move should already be well priced in by now, especially when you weigh the virus developments across the region over the past few weeks.
Hence, there may be limited scope for the euro to move even if the announcement is brought forward. Sure, it is a telegraphed move but the pace in which the virus situation has escalated just means that we're on a quicker trajectory, not a different one.
Otherwise, we can just expect a more sombre tone by the ECB today in order to lay the groundwork for more potential easing measures down the road. The more dovish tone may be something to be wary about in any case later today.
However, one thing is for sure; you can expect Lagarde to press governments for more fiscal action amid the likelihood of a 'double-dip recession'.
Some previews ahead of the policy decision later in the day:
