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Tomorrow at 12:45 pm GMT the European Central Bank (ECB) will publish its policy decisions for the month of December.

What are traders expecting from the event and how will it affect the euro’s price action?

Here are points you need to know about if you’re planning on trading the event:

What happened last time?

  • As expected, the central bank kept its policies unchanged in November
  • Eurozone economies like Germany and France had just implemented new lockdown restrictions and the U.S. was days away from its Presidential elections
  • ECB shared that risks are “clearly tilted to the downside”
  • New projections in December are expected to allow the ECB to “recalibrate its instruments” to boost inflation
  • President Lagarde: recovery losing momentum more rapidly than expected
  • Lagarde: “little doubt” that the ECB will act in December
  • The euro weakened across the board on the ECB’s lack of pre-emptive stimulus and Lagarde’s dovish tone

What are traders expecting?

Basically, traders want the ECB to walk the talk and make €€€ rain.

Lagarde and her team can use a number of tools, but market geeks are eyeing two specific ones: the PEPP and the TLTRO.

No, they’re not the latest K-Pop group sensation. The Pandemic Emergency Purchase Programme (PEPP) was established in March to buy public and private securities during the “crisis phase” of the COVID-19.

PEPP originally had a budget of €750 billion until the end of 2020, but the ECB expanded the program in June to cover a total of €1.35 trillion until June 2021.

Analysts now see the ECB further expanding PEPP by another €400-600 billion to last until the end of 2021 or even early 2022.

Meanwhile, the Targeted Longer-Term Refinancing Operation (TLTRO) aims to nudge banks into lending to “main street” businesses and consumers instead of buying high-yielding assets with their cheap loans.

The TLTRO III was launched in March 2019 but was expanded in March 2020 to reflect easier lending restrictions and lower interest rates.

Markets see the ECB stepping up its TLTRO III program by further cutting its rates, expanding its collateral requirements, extending loan durations, and prolonging the program’s duration to infinity and beyond.

Aside from PEPP and TLTRO, here are other points to watch from the ECB:

  • Lagarde may adopt a cautiously optimistic tone over the vaccine developments
  • Growth and inflation projections will likely be adjusted lower to reflect recent lockdown measures
  • Forward guidance could mention lower rates and more asset purchasing programs for longer
  • Lagarde may also emphasize the urgency for a fiscal stimulus for the region ahead of the EU Summit later this week
  • Discomfort over the euro’s strength might inspire some profit-taking among EUR bulls

Lagarde has a presser at 2:30 pm GMT so make sure you don’t miss any and all hints of future policy decisions!

How can you trade the event?

One thing to keep in mind is that a lot of traders have likely priced in the ECB’s additional stimulus.

So, unless Lagarde and her friends expand their programs waaaay more than what markets are expecting, then EUR could have a limited reaction to the news. Heck, we might even see a buy-the-rumor, sell-the-news situation!

Oh, and don’t forget about other market themes influencing the majors these days! Positive vaccine updates, for example, could upstage the ECB’s stimulus announcement. Ditto for Brexit updates, which may or may not point to a hard Brexit (read: A LOT of uncertainty) in just a few weeks.

Can’t decide which euro pair to trade? Check out the most volatile EUR pairs in the last seven days and see if there’s room for some movement in the next trading sessions!

EUR pairs average volatility from MarketMilk
EUR pairs average volatility from MarketMilk