With the ECB meeting coming up there are two key issues markets are focused on:

  • What will happen to the PEPP program?
  • Will the ECB push back against the market looking for a rate hike in 2023?

Let’s look at them one at a time.

What will happen to the PEPP program?

The emergency pandemic purchase program started to ease conditions due to COVID-19. See chart below:

Now the PEPP program has been helpful for the ECB and there has been a talk about ‘flexibility’. The ‘everyday’ easing tool has been the Public APP purchase program. So, expectations are that some of the PEPP program will end up being part of a larger APP program. The ECB is expected to increase the pace of APP purchases from €20 billion to €40 billion per month in March next year when the APP is due to expire. See below for Bloomberg’s economist’s survey of what is expected.

So, the first issue is what is going to happen with the PEPP program? Will it end in December? Will it be extended? Any extension should favour the USD against the EUR and result in EURUSD selling.

Will the ECB push back against the market looking for a rate hike in 2023?

Inflation is forcing some central bankers hands. Will the ECB react to this inflationary pressure? Will Christine Lagarde push back against the Eonia forwards which are seeing rates lifting off in 2023? Any hint that the ECB is responding to inflation with sooner rate hikes would lift the EUR. EURGBP would be a likely beneficiary from such an outcome.

What to expect

Not much. The December event is seen as the main one. This is seen as a bridging event. Any extension of the PEPP program, while the FED is looking at announcing tapering next month, will result in a divergence between the FED and the ECB. This would likely favour EURUSD weakness as an initial reaction out of the meeting. However, no changes are expected and it should be a non-event. The only thing to watch out for is any hint of Christine Lagarde becoming worried about rising inflation.