Is Draghi packing the bazooka this week?

Draghi expected to deliver at penultimate meeting

The ECB meeting on Thursday promises to be a thrilling event as Mario Draghi attends his penultimate meeting as President, with markets expecting the stimulus bazooka.

With markets pricing in a 100% chance of a 10 basis point rate cut, this is the absolute minimum that the central bank must deliver to avoid a backlash and even this is unlikely to be enough.

There has been a lot of speculation about what could accompany a rate cut in order to re-energise an economy that is flat-lining once again, with QE, tiered deposit rates and more all discussed.

  • Draghi leaving eurozone in stronger position
  • One more bazooka?
  • Expectations very high

Draghi pivotal to eurozone revival

Draghi has been no stranger to massive stimulus packages, having guided the euro area through an extraordinary period over the last eight years that repeatedly had people questioning whether the block was doomed to failure and on the brink of collapse.

From his “whatever it takes” speech – that many regard as being the turning point of the debt crisis – to its first quantitative easing package that brought government yields back to more sustainable levels and, in many cases, negative territory, Draghi has been at the forefront of the revival.

It seems Draghi has one more bazooka in his arsenal, or so investors are hoping. Draghi listed a number of options that had been discussed at the meeting in July, which interestingly didn’t include a rate cut to the distress of traders at the time. They’ve since got over it.

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Are traders expecting too much?

Traders’ expectations are extremely high ahead of the meeting, with a rate cut fully priced in, around €30 billion of QE touted and a decision on tiered deposit rates.

It’s going to be difficult for the ECB to live up to these expectations when there are dissenters within the group that aren’t even convinced about the need for stimulus and when the Presidency is due to change hands.

The euro has rebounded recently against the dollar and yen, but this probably has as much to do with the improved risk environment than anything else. It’s testing 1.10 against the dollar at the time of writing and continues to look vulnerable to further downside.

If the ECB fails to live up to expectations, the knee jerk reaction on the release could be significant. It will then be up to Mario Draghi to manage expectations 45 minutes later and possibly reassure investors that it’s not a case of if but when.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.