ECB meets today but is likely to preserve bullets

The European Central Bank (ECB) Governing Council meets today. With September inflation back in red and 2015 inflation expected to average a tepid 0.2% (DBSf), authorities are clearly concerned over missing the 2% inflation target. 

At the same time, the euro is off lows, especially as USD strength fades as US rate hike risks diminish. The common currency is back to its pre-QE highs on trade weighted index terms, diluting the impact of on-going asset purchases. The ECB's monetary conditions index has also pulled back since its high in Mar15 This implies tighter domestic conditions on the back of easing real exchange rate, while short-term rates flatline. 

Despite the risks that inflation will miss targets, any increase is not expected in the scale or scope of asset purchases in the near-term. The official guidance nonetheless will remain clearly dovish as the central bank plays up the available headroom to step-up policy action in the coming months. Impact of a slowdown in China, low commodity prices depressing inflationary expectations, tentative domestic recovery and fallout of any EM risks are likely to be highlighted as key risks. 

Hence, much attention is likely to be on the ECB's policy guidance, where the authorities are expected to be out in force to show its readiness to add more stimulus but just not yet. Preference will be to preserve ammunition for the time being.