A usual meeting which became more serious!
ECB will have an interest rate decision and monetary policy meeting on Thursday, 22 July. While usually July meeting was a quiet meeting before summer holıday, this meeting became so important this year and because of a current situation.
Two weeks ago, we had the ECB special meeting in Hamburg, where they announced some changes in the ECB strategies, which are planning to be complete by September this year. By now, what we know is that "ECB dropped its' close to, but below 2%' inflation target. It is now at 2% with tolerance for temporary spikes above". This policy was recognized as an expansionary policy by investors and market participants.
Let's get to the details and see what the main points that we need to focus on for tomorrow meeting is:
1- Can ECB stay unit?
One of the main risks over the ECB and generally EU was staying unit, especially during coronavirus crises. Anyway, while divisions between the ECB council members remain high, we are still waiting for more cooperation because of common coronavirus plans.
2. Interest rates.
We are not expecting any changes in the current rates levels; however, some changes in the monetary policies are expected to meet the new 2% inflation target, and it is supposed to be a bit Hawkish.
3- What will happen to PEPP?
The current 1.85 trillion euro ($2.2 trillion) PEPP emergency stimulus scheme will expire in March 2022; however, with the latest virus outbreak, some analyses are waiting for a renewal Statement by September 2020. On the other hand, it is also possible to see the central bank wait for more updates from inflation after the summer holiday, before any new update.
4- ECB and Market Risks
Increasing coronavirus infection rates, mainly by the Delta variant, are forcing more European countries to re-establish restrictions, even if it will be temporary, negatively affecting economic recovery and raising the market risks, and this is the most significant risk for the EZ economy, especially for Service-based economies than production and Manufactory based countries. For this part, we have to check out the Central bank outlook and Mrs. Lagard press conference.
Market reaction:
For different reasons and situations, we can expect the dovish tone as much as we can wait for Hawkish policies. Generally, the dovish policy can put more pressure on Euro, and Hawkish policies support the currency against its crosses. Currently, EURUSD moves under the key level of 1.1800, and a possible ultra dovish policy can send it lower towards 1.15 area. In contrast, with the Hawkish policy, a return above 1.20 area is more likely.
