What to expect from the ECB later today?

This is going to be one of the more interesting ECB meetings as policymakers will have a lot to think about when communicating to the market. Let’s take a look at the situation coming into today.

The Russia-Ukraine war is obviously the big thing and that is going to bite at euro area economies. Add that to the surge in energy prices, which will only exacerbate inflation pressures even more. I mean, high inflation is already looking to be more persistent and sticky so the recent crisis isn’t going to help alleviate the situation. On top of that, there was the case of a weakening euro as the outlook to the economy worsened and rate hike expectations are pared back.

So, what is the ECB going to do today?

First thing’s first, is that they have to do something to maintain that they are going to be able to tackle the  inflation 
Inflation

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Read this Term problem.

In that regard, I don’t expect much of a change in policy language – at least not in any way that matters. They aren’t going to commit to preparations for a rate hike but they will be angling towards that, as they did previously. But in any case, expect the language on inflation to be maintained i.e. that it will ease later in the year and also next year.

An important detail to look for in this regard is any mention of flexibility to hike rates while asset purchases are still taking place. It is something that is ruled out by the official statement but we’ll see if the ECB wants to add this option into their toolkit.

There might not be much mention on the Russia-Ukraine situation, as that will likely be addressed by Lagarde’s press conference. But again, it will be interesting to see how this plays into their forward guidance and inflation outlook. However, I don’t see the overall language changing too much besides possibly acknowledging higher risks to the latter.

As for the forward guidance in detail, I don’t think anyone is expecting a rate cut anymore so the ECB may just opt to provide more clarity in ruling that out completely.

Besides all of that, it will be interesting to see if the ECB will decide to step in with any verbal intervention in mentioning the euro’s recent slump amid more volatile conditions. In my view, I doubt they will step too far but it is something to watch for in case they do introduce something that could impact the euro later in the day.

The Q&A session in Lagarde’s press conference will arguably be the more interesting event. We’ll see how she responds to Russia-Ukraine risks, how that factors into the ECB outlook, and if that has changed discussions to end APP, and how soon rate hikes may be introduced to combat rising inflation pressures.