At its meeting today, the European Central Bank may commit to extending monetary stimulus. This will be the first meeting since the bank unveiled its new strategy.
Under the new strategy, the ECB is targeting to keep inflation at 2% and even allow it to go higher or lower in the short term. Previously, the ECB's target was inflation close to, but below, 2 percent. Policymakers may take climate risks and some maintenance costs more closely into account when making monetary policy decisions. While no new measures are expected to be announced for now, ECB chief Christine Lagarde signaled interesting changes to the bank's guidance that will set the stage for a series of decisions, including the future of the Pandemic Emergency Purchase Program (PEPP). She also announced shorter, more incisive monetary policy statements to help communicate with the market.
Currency traders are betting that today's meeting will be the least price-generating since January 2020, according to Bloomberg. Hedge funds and interbank dealers are looking for opportunities to potentially sell increases in the EUR/USD exchange rate, if any. The Governing Council may update its forward guidance, but a debate on withdrawing emergency bond-buying is not expected until September, Bloomberg reports. Traders in the FX options market might expect relatively little price action in the EUR/USD pair, as the implied volatility for overnight options is below 10 percent, which could translate into estimated volatility of 50 pips for the major currency pair. According to the FX options market, volatility can only increase if the euro falls.
European stock indices are rising in anticipation of the ECB decision. Germany's DAX seems to be gaining over 0.8 percent, Spain's Ibex is up over 1 percent, and Italy's FTSE MIB is up 1.5 percent. The ECB's raising of its inflation target and the announcement that it will not end, but modify its asset purchase program under the PEPP may be beneficial for stock market bulls, because it may mean long-term support for the financial sector, the credit market and the economy.
The ECB's decision will be published today at 13:45, while the press conference will start at 14:30.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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