The European Central Bank meeting today is drawing a lot of investor attention given the current rise in European (and global) yields. With a strong reflation trade underway across the markets, there is a great deal of speculation as to whether the ECB will be forced to take further action today in order to help supress yields.

Notes From The Last Meeting

At the bank’s last meeting, monetary policy was held at current levels with the bank also outlining that if the economy continued to recover at the rate it was, the full scope of the PEPP would not need to be utilised. This was a clear vow of confidence in the pace of the economic rebound which has continued since that meeting. The latest inflation data came out above expectations while recent PMI readings have surprised to the upside also.

However, the ECB has been keen to continue highlighting the residual risks and uncertainty which remain. With the economic block seeing a slower vaccine rollout than the US and the UK, the economy remains more fragile and this is something the bank will certainly take into account. With regards to rising inflation expectations, Lagarde reiterated the bank’s view that any increase in inflation over coming months would be transitory and need not impact the ECB’s monetary policy plans. Essentially, saying the same thing we have heard from the Fed recently.

Expectations For Today’s Meeting

Profit taking in the DAX today, ahead of the meeting, suggests there is some caution going into the meeting. However, the broad expectation is that the bank will hold policy unchanged. Traders will be paying close attention to Lagarde’s remarks in the press conference following the decision, to see how the ECB head addresses the rise in bond yields and the increasing inflation expectations. This is where most of the market impact is likely to be found.

Likely Market Impact

If Lagarde is firm in offering reassurance that the bank is willing to take action to curtail any unwanted effects from the rise in bond yields, then this should help put a lid on European yields and send EUR lower too. Traders will be looking for clarity and decisiveness in Lagarde’s comments on yields. If the ECB head is weak in her attempts to downplay the yields rise, this could give traders a green light and see yields and EUR much higher on the back of the meeting, which is precisely the opposite outcome the bank is looking for. In all, it will be a balancing act for the bank between striking an upbeat assessment and outlook for the economy and helping prevent a further rise in inflation expectations and yields.

Technical Views

EURUSD

EURUSD is continuing to correct lower as part of the reversal from the 1.2346 level which saw price breaking down below the rising channel from last year’s lows. However, while price holds above the 1.1802 level, the move is still viewed as corrective and a continuation higher is still the preferred play. A break below the 1.1802 level, however, would open the way for a test of 1.1611 support next. To the topside, 1.2090 is the level bulls need to reclaim to regain momentum.

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