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Oct 23 - 10:55 AM

Credit Agricole:: What to Expect from the ECB Policy Meeting on Thurs?: Implications for the EUR

By eFXdata  —  Oct 23 - 09:50 AM


Credit Agricole discusses expectations for the upcoming European Central Bank (ECB) policy meeting, highlighting its potential effects on the Euro (EUR) and the broader market dynamics within the Eurozone.

Key Points:

  1. ECB's Tightening Cycle: The focus for the week will be the ECB's policy meeting. Credit Agricole suggests that while the ECB may have concluded its rate-hiking phase, it is expected to pursue quantitative tightening (QT) by reducing its balance sheet and withdrawing excess liquidity from the system. This ongoing shift towards a less accommodative monetary policy could continue to underpin the EUR.

  2. Impact on Yields and Liquidity Premium: The ECB's actions are likely to have an evolving influence on the financial markets. The support for the EUR may shift from being driven by short-term interest rates to being influenced by changes in Euro Government Bond (EGB) real yields and the EUR's liquidity premium.

  3. Market Anticipation of Policy Signals: Market participants will be keenly awaiting any indications from ECB President Christine Lagarde regarding an acceleration in QT or plans for further liquidity absorption. Historically, a relative reduction in the ECB's balance sheet compared to the Federal Reserve's has been associated with a strengthening EUR/USD.

  4. Concerns about the Eurozone Periphery: While the ECB's balance sheet reduction could potentially support the EUR, it's also important to consider the impact on peripheral economies within the Eurozone. Tightening financial conditions could pose challenges, possibly limiting the EUR's upside.

  5. Potential Intervention Tools: In response to any significant market volatility, especially in the EGB market, Credit Agricole believes the ECB could employ certain measures. These include the yet-to-be-utilized transitory period instrument (TPI) or continuing purchases under the Pandemic Emergency Purchase Programme (PEPP). Such interventions could help manage market stability.

  6. Credible Commitment to Balance Sheet Reduction: The report concludes with the expectation that the ECB could convincingly commit to further reducing its balance sheet in the foreseeable future, providing ongoing support to the EUR.

Conclusion: Credit Agricole anticipates the ECB's forthcoming policy meeting to be a pivotal event, with potential implications for the EUR's valuation and broader market stability within the Eurozone. The bank's nuanced approach to monetary tightening, coupled with its readiness to intervene if market volatility spikes, could lend credible support to the EUR, albeit with attention to the peripheral economies' sensitivities.

BofA Global Research


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