Heads up, euro traders!
The European Central Bank (ECB) will be sharing its March policy decisions on Thursday (Mar. 10, 12:45 am GMT).
What are markets expecting and how might the euro react?
If this is your first central bank event, you might want to read this lesson on why central bank decisions are a huge deal!
What happened last time?
- ECB kept policies unchanged as expected
- PEPP to be discontinued at the end of March
- APP to purchase €40 billion in Q2, €30 billion in Q3, then €20 billion from October onwards
- ECB doesn’t rule out a 2022 rate hike, said “situation has indeed changed”
As expected, ECB President Lagarde and her team didn’t make policy changes in February. Their key interest rates are at lower levels, Pandemic Emergency Purchase Program (PEPP) will still end in March, and Monthly Asset Purchase Program (APP) purchases will gradually slow down this year.
What caught the markets’ attention, however, was Lagarde refusing to repeat her December statement that a 2022 rate hike was “very unlikely.”
Instead, the ECB head honcho shared that “The [inflation] situation has indeed changed,” and that the council will revisit said situation in its March meeting.
EUR 15-Min Forex Charts
The hawkish tilt (more “ish” than “hawk,” tbh) surprised the markets and sent the euro higher across the board.
What are traders expecting this time?
- ECB to cut growth and raise inflation forecasts
- ECB to signal flexibility to phase out APP sooner than scheduled
- Russia-related uncertainty to require flexible projections and policy options
Just when ECB members were ready to “circle back” to Eurozone’s inflation situation and talk tightening, Russia threw a curveball and added A LOT more uncertainty into the mix.
So, aside from revising its growth forecasts lower and inflation estimates higher, markets also expect the ECB to speculate on the impact of Russia’s invasion on the economy and its monetary policy trajectory.
The increased uncertainty will probably be why ECB will want to keep its options as open as possible. After all, Lagarde had once noted that “every decision we make usually only takes full effect nine to 18 months later.”
ECB will likely want the ability to raise rates so it might consider phasing out the APP sooner than the members outlined. To keep rate hikes an option instead of certainty, though, Lagarde and friends could also stress that the end of APP won’t necessarily lead to a rate hike.
Meanwhile, ECB members could also keep bond purchases or a longer bond purchasing program on the table so that they could make €€€ rain if needed.
This post first appeared on babypips.com
