The Governing Council of the European Central Bank (ECB) is having a monetary policy meeting this Thursday, and pressure mounts on policymakers to provide additional support to the battered Union. However, it seems unlikely that the central bank will act this time. The lack of any tangible policy deliverables diminishes the risk of a significant directional move in EUR/USD — particularly with the US election looming next week. TD Securities’ base case sees two-way risks around current levels while most other scenarios see spot contained within familiar ranges.
“Hawkish (25%): Refusal to recognise downside risks. Policy and press release unchanged. The ECB still views the economy as evolving roughly in line with base case forecast. Brushes off weak inflation as being entirely one-off effects. No clear signal that ECB is considering further QE this year. EUR/USD at 1.1835.”
“Base Case (65%): Policy unchanged, door open to more QE in December. Policy and press released unchanged. Downside risks to growth have increased on the second COVID-19 wave. Underlying inflation has turned lower. Economy tracking closer to ECB’s downside macro scenario from Sept, and ECB will ensure to calibrate stimulus with new staff macro forecasts in December. EUR/USD at 1.1750.”
“Dovish (10%): Announces PEPP extension now rather than waiting for December ECB pre-emptively announces that PEPP will be increased by ~ €500 B and run until end-2021. The obvious deterioration in the macro outlook justifies acting more promptly. Growing lockdowns through the second coronavirus wave make it impossible to reach ECB’s 3.1% QoQ forecast for Q4. ECB acting preemptively as it recognises that the crisis will persist and have a major economic impact for longer than previously thought. EUR/USD at 1.1675.”