ECB to reiterate dovish guidance

The ECB Governing Council meets today. The benchmarks rates are likely to be left steady, guidance will be dovish with an eye on containing the EUR/USD rebound and defend pressure to ease policy further. 

Policymakers will emphasise on the available policy tools, in light of heightened global headwinds and domestic inflation that is running way below targets. Official 2016 inflation estimates will also get a relook at the end of this quarter and likely to be revised lower from the current 1.0% (Dec15 at 0.2% YoY). 

The headwinds have strengthened at the start of this year. Financial conditions have deteriorated amidst China-led volatility, renewed plunge in commodity prices and a rebound in EUR/USD, which threatens to throw inflation and inflation expectations off course. The renewed slide in global energy prices is likely to temper the extent of base-effects driven bounce in inflation. Inflationary expectations, using 5y5y forward breakeven rate as a gauge, have also been tracking global commodity prices lower. 

"We expect base effects to lift inflation to 0.8% in 2016 (vs 2015's 0%) with downside risks, but the 2% target will prove elusive", says DBS Group Research.

Overall, ECB's rhetoric will remain dovish, with the EUR/USD likely to react briefly to the commentary before returning to reflect the broader risk-off mood.