ECB meeting preview: will rising yields put pressure on ECB to adjust policy?

​ECB meeting: when and where?

The forthcoming European Central Bank (ECB) meeting will take place on Thursday 11 March. The initial monetary policy decision will be announced at 12.45pm (London time), with the press conference getting underway at 1.30pm.

Eurozone recovery remains uneven

The eurozone outlook remains somewhat uneven as we move forward, with countries exhibiting varying degree of economic restrictions in a bid to contain the coronavirus pandemic.

From a sectoral perspective, the recent purchasing managers index (PMI) readings highlight how manufacturing continues to drive growth which remains beneficial for the likes of Germany in particular.

Vaccination effort should help the services sector recover, yet the eurozone efforts have been hampered by delayed deliveries thanks to initial hesitancy in signing agreements with manufacturers.

Nevertheless, while there are some questions over the recovery speed, the pathway appears to be leading in the right direction as the reopening process continues.

What should we expect from the ECB?

The economic outlook will be key on Thursday, with fresh forecasts provided at this meeting. From a growth perspective, the December gross domestic product (GDP) predictions that we will see the eurozone grow at 0.6% in the first quarter (Q1) seems unlikely given ongoing economic lockdowns.

Meanwhile, we are likely to see upward revisions to inflation given the rise we have seen in oil prices and treasury yields. Inflation will undoubtably be a key consideration for central banks over the course of 2021, and thus traders will be watching closely for any significant changes on Thursday.

On the policy-front, the ECB has laid out a clear outlook, with the bank promising to remain accommodative until inflation tops their 2% target. Previous calls for action from the ECB to counteract euro strength have certainly subsided given the weakness in both EUR/GBP and EUR/USD.

The forthcoming ECB meeting looks unlikely to provide too much by way of tangible adjustments to the current monetary policy set. However, one area of interest is on the pandemic emergency purchase program (PEPP) front, where we could see the bank front-load their purchases in the face of rising treasury yields.

A decision to increase near-term purchases would help drive down yields after the recent rise. Although as we saw with US Federal Reserve chair, Jerome Powell's unwillingness to act in a bid to lower yields, a failure to do so in the face of expectations can send yields sharply higher.

Nevertheless, while a decision to front-load PEPP purchases could help drive yields lower over the near-term, this would likely only provide a temporary reprieve given the direction of travel expected as we move through the year.

After all, a decision to front-load purchases could ultimately mean a shorter overall programme. Thus a decision to raise near-term purchases may also require an increase to the overall PEPP scheme which seems somewhat unwarranted to implement right now.

EUR/USD falling back into key support zone

EUR/USD has been on the back foot over the past month, with the pair falling back into a confluence of trendline and 76.4% Fibonacci support. The long-term downtrend evident on the monthly chart has been coming into question over the course of the pair, yet momentum appears to be shifting according to the stochastic oscillator.

With that in mind, traders should keep a close eye out for whether we can hold up from here or not. A break below the $1.1602 level could bring a wider bearish outlook into play for EUR/USD.