FxWirePro: ECB’s meeting of the year

Today European Central Bank (ECB) is to provide further guidance in policy meeting. Result to be announced at 11:45 GMT, followed by a press conference at 12:30 GMT. The meeting is to be held in Frankfurt, Germany.  It is widely considered as ECB's policy meeting of the year as it is widely anticipated that the central bank would announce tapering.

Current policy measures–

• Deposit facility rate at -0.40 percent
• Refinancing rate 0.00 percent
• Marginal lending facility rate at 0.25 percent
• ECB is buying €60 billion assets per month.
• ECB had launched four new TLTROs.
• Under the new rule, assets can be bought at yields below the deposit rate.

Expectation today –

• European Central Bank would announce its decision to further curb its stimulus. However, it is widely expected that the current asset purchase program would be extended well into H1 2018. Here are various possible scenarios,
   
• Case 1: The central bank will extend the QE for another nine months but at a reduced pace of €30 billion. In that case, ECB will hit purchasing limit on German bonds in February 2019 and ECB is expected to hike rates for the first time in H1 2019. Euro bearish neutral
   
• Case 2: ECB extends QE for another 12 months but at a much-reduced pace of €20 billion. In that case, ECB will hit purchasing limit on German bonds in October 2019 and ECB will hike in the third quarter of 2019. ECB communications have suggested that sufficient time (probably six months) will be allowed between QE end and rate hike. Euro bearish
   
• Case 3: The central bank winds up QE in the next six months but continues with €40 billion per month. In that case, ECB would hit the limit on German bonds without any changes in composition by September 2018. In such a case, a rate hike might come as early as the first quarter of 2019. Euro hawkish neutral
   
• Case 4: ECB might even announce a fixed amount of QE. For example, it might announce €250 billion extensions to the current QE program phased over 9 or 12 months. In such a case, German limit will not be hit until September 2019 if composition remains unchanged. Euro hawkish neutral
   
• Case 5: ECB might take up the gradual tapering route with €5 billion reductions per month beginning December and that will end the QE in December 2018 and the first rate hike can happen in H1 2019. Euro hawkish
   
• Case 6: This is a less likely scenario, where ECB bundle asset purchase and reinvestment together to announce a gross purchase amount distributed over six, nine or twelve months. Euro hawkish

Impact –

The euro has remained upbeat since the French election outcome in April. The performance improved after suggestions from officials at the ECB that next move is likely to be winding up of extraordinary stimulus. The weakness of the dollar is also proving support. However, it has declined to 1.181 as of today from its peak around 1.209 in September.

The impact would totally depend on the decision taken.