Here Comes the ECB

It seems that by dubbing its QE program as the Pandemic Emergency Purchase Program, the ECB gifted the hawks an opportunity to insist on a taper. Will that occur as soon as today as the program winds down by next March. Will the signal occur today?  The ECB announcement is at 12:45 pm London and ECB pres Christine Lagarde's presser follows 45 mins later. Not only the Eurozone economy has shown notable improvements, but inflation has posted the biggest jump in over 10 years. The PEPP currently runs at EUR 80 bn monthly. We expect the ECB to ugrade its growth and inflation projections, which should (not could) send EURUSD above $1.19. Ashraf tells me Lagarde will emphasise the economic upgrades rather than signal an upcoming taper, and that could lead to a confusing press conference. 

What Lagarde may try to engineer is a more-flexible APP program to fill in the gap, and maintain the current level of easing. Such strategy risks a multitude of communications errors, that could boost the euro and bund yields. 

Today's meeting is particularly fraught because ECB communication is likely to emphasize better-than-anticipated economic performance and new inflation challenges.

A further problem is brewing around year end when the Fed tapers its purchases. That will push up global yields and tighten European financial conditions. It may put the ECB back in a position to ease further, something that could compound euro losses.

For now though, the combination of inflation, economic growth and the reduction of the PEPP are all euro positives and $1.1940/50 should be back in play.  Lagarde will be cognizant of that though and may try to balance it with layers of jawboning.