How are things shaping up ahead of the ECB later on Thursday?
Expectations for a lively ECB meeting has died down quite a bit but tapering of PEPP purchases is still certainly on the table. I’ll try to make this as succinct as possible.
There are only a few options that the ECB can work with this week. The first being that they reduce the pace of PEPP purchases in Q3 but reaffirm all of the ongoing dovish language when it comes to rates and any tightening of policy outside of PEPP.
That is arguably the base case scenario and to be fair, most of that has already been baked into market expectations by now.
The other two options are less likely, being either the ECB surprises on the dovish side and push back their decision to taper later or that they misstep and communicate a more hawkish message – which will be highly unlikely given prevailing conditions.
The former will see the euro slip while the latter will see the euro gain due to the nature of the surprise. Meanwhile, the base case scenario is likely to provide a bit of a mixed reaction but I reckon we may see a ‘sell the fact’ play transpire instead.
Looking at EUR/USD, if the dollar keeps steady, it is tough to see upside levels hold a meaningful break above 1.2200 with short-term resistance @ 1.2243-66 likely to keep a lid on gains barring a hawkish ECB outcome.
The downside is more interesting as a break below 1.2100 may set off a run towards the 100-day moving average (red line), seen today @ 1.2040.