That package is expected to include QE as well

  • ECB meeting largely met expectations, indicating a very likely rate cut in September
  • Forward guidance change reaffirms markets being fully priced for September
  • Suggests that a 10 bps deposit rate cut will be delivered
  • Detail on other potential stimulus measures is not clear
  • But ECB are clearly making preparations in that regard
  • Expects a cut will be delivered in September as part of a broader stimulus package

The part on "other potential stimulus measures not being clear" is precisely what has been influencing price action in the euro since the decision yesterday in my view.

A 10 bps rate cut was already fully priced in for September going into yesterday's meeting so the ECB's stance does little to change that. So, the question now is what are the other measures they will introduce or in to be more exact, how deep will they dig into their stimulus toolbox in two months' time?

That will depend on how internal discussions go and how severe the further slowdown in economic data over the coming weeks will be. As for Westpac's expectations:

"We expect that the cut in September will be followed by a tiered deposit rate to mitigate the pressure on banks and that asset purchases of sovereign bonds will be restarted. Our expectation is for the ECB to introduce a €30bn per month program in December lasting for a year at this stage.For that to occur, the ECB will need to increase their self-imposed issuer limits from the current 33% given German Bunds are already at that limit. For example, given €1.6tn of Bunds outstanding, a new issuer limit of 45% would allow room for the purchase of ~€200bn bunds, and with Bunds representing roughly 25% of purchases, that would create room for ~€800bn of total sovereign European bonds."

I reckon more and more firms will also take a similar view with markets also looking to err towards such a stance as well in due time (once the Fed is over and done with). The full piece by Westpac can be found here and is certainly worth a read.