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What to expect from the ECB?

The European Central Bank will announce its latest decision on rates and monetary policy at 11:45 GMT, with the ECB president Mario Draghi taking press questions 45 minutes later. 

Further rate cuts are very unlikely: the main refinancing rate is expected to stay at 0.05%, while the deposit rate - at -0.2%.

Market attention will be focused on the details of the asset-backed securities and covered bonds purchases programs that will likely start this month. The most important questions for the markets are how much and what exactly the ECB is going to buy.

According to the most recent Reuters forecast, the ECB will spend around 200 billion euros for asset purchases till the end of the year. Some experts don’t expect the overall volume to overcome 100 billion euros. The insufficient amount of stimulus won’t be enough to change the inflationary expectations and trigger the economic recovery. As a result, we could see EUR/USD falling further on increased economic uncertainty. Large amount of asset purchases could add to market optimism and support the pair - at least in a short term. 

As we understood from the TLTRO (targeted long-term refinancing operations), announced in earlier September, the amount matters. The ECB offered banks to take cheap loans, but the demand was much lower than expected (only 82.6 billion euros). The markets became worried as the ECB ability to support the economy came under question. This time the ECB will likely sound more decisive and dovish to convince the markets. However, the unknown ECB officials said the initial amount of buying will be modest. 

At the same time, the composition of the asset purchases is also important. Draghi is not really worried about the asset quality these days: he proposed buying some “junk” securities of Greece and Cyprus. The news could offer some support to the single currency.

The pressure on the ECB to launch full quantitative easing (QE) is mounting. However, the regulator doesn’t seem to be ready for such cardinal measures. 

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