ECB Meeting: Predicting The Unpredictable - Market Reaction After ECB

 | Sep 10, 2019 05:49AM ET

  • Thursday's ECB meeting is the most awaited ECB meeting in more than a year. The stakes are high as inflation expectations are far below target amid lingering economic uncertainty, which means we believe the Governing Council will be forced to act. However, the Governing Council members are divided about the need for further stimuli, although we do not think the hawks will be strong enough to prevent a bold package but the risk of a less aggressive compromise (smaller volume with longer purchase period) exists.

  • In recent days, risk on has been the dominant market theme, reflecting better risk sentiment and likely lower QE expectations. Ultimately, the market reaction will depend on the ECB's credibility, willingness and commitment to do 'whatever it takes' and, in our view, sending these signals is more important than the exact design of the measures. We remain sceptical about the inflation/economic impact of 'more of the same'; however, the absence of action in the current environment would be worrying.

  • We sketch out the different potential outcomes of the near-term market reaction and present our crib sheet of what to look for during the meeting on Thursday.