The European Central Bank is expected to extend its quantitative easing programme beyond March 2017 at its last monetary policy meeting this year, scheduled on December 8. Also, the Italian constitutional referendum, to be conducted on December 4, will direct the decision of the board members.

If Matteo Renzi’s proposal of constitutional reform fails, as the polls suggest, there may be early elections and higher risk premiums for Italian government bonds. Not only the ECB is concerned that this may cause unrest in the financial markets. The FX market is nervous too.

Further, the implied EUR/USD volatility for the coming two weeks recently rose to the levels seen during the rather volatile US election night. As a result, ECB Vice-President Vítor Constâncio underlined yesterday that the ECB would react to “shocks” caused by the Italian referendum.

On the other hand the, pressure for further expansionary measures on the part of the ECB has eased since the US Presidential elections. USD appreciation that led to euro weakness should not only support foreign demand for export goods but also fuel inflation.

Also, the rise of the long-term inflation expectations, caused by global Trumpflation hopes which have brought these back to the levels seen in 2015 provides a little leeway for the ECB. The ECB will only be able to extend the QE programme if it changes its technical parameters and even then the risk of running out of bonds will force it to reduce the bond purchasing volume by the end of 2017, which is likely to support the euro, Commerzbank reported.