Bank of America Global Research discusses its expectations for this week's ECB policy meeting on Thursday.
"We expect a 25bp ECB hike, but more is not unthinkable. Lagarde will likely leave door open for more than 50bp in Sept. OMT-light tool may not be all ready yet, but we should still get partial announcement at least. We think conditionality/triggers will invite market testing on new tool. Italy's latest political developments are not helping. We are short the front-end and in flatteners outright and cross market. We see risks that the anti-fragmentation tool may surprise a market very underweight the periphery," BofA notes.
"Discussions on neutral and terminal rates key to dampen volatility. Before the ECB finalizes the anti-fragmentation tool and starts hiking by as much as most other G10 central banks, we would not expect the EUR to find support. We would also not expect ECB verbal FX intervention, as their current policies are consistent with EUR weakness," BofA adds.
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