There are mainly three unknowns that will affect the next decisions of the ECB: the performance of China, Greece and the decisions in terms of monetary policy of the Federal Reserve. This morning the Frankfurt board meets and all eyes will be on Mario Draghi who will speak at the press conference in the early afternoon.
On the table of the Governing Council of the ECB there will be the new economic forecasts for September which are affected by the Chinese storm that is hitting world markets. The summer collapse of the Dragon will affect the next decisions of the Fed probably perhaps postponing the expected rate hike. In this case, the exchange rate between the dollar and the yuan and between the greenback and the euro could appreciate.
The ECB has to deal with a euro that has risen sharply in recent months. The exchange rate of the single European currency against the main currencies rose by 5,8% from April, also recording a peak of 7,3% in August. Currently the ECB has to deal with an index that is around the levels of January, when the Quantitative Easing program started.
Government bond yields are also on the rise, especially on medium-long maturities which seem to have already exhausted the benefits of Qe. The results have been obtained in recent months, but perhaps Mario Draghi expected some more effects from his monetary bazooka. During today's press conference he could once again reiterate the ECB's willingness to continue with the bond purchase program and, if necessary, extend its maturity.
The unknown Greece weighs on this situation. The board of the ECB must decide whether to include the country among the beneficiaries of near-zero cost liquidity. The European bank is expected to grant a new exemption to Greece thus allowing its banks to enjoy Qe despite its government bonds being well below the required rating. The minimum requirement requested by the ECB is in fact a BBB rating while the government bonds of Athens stop at the CCC. The decision, which the board could also take at a later time, would prevent Greece from having to resort to ELA's emergency liquidity. Everything revolves around the agreement for the bailout plan and the preliminary reforms put in place by the Tsipras government: if they are judged sufficient, the Governing Council will give the go-ahead for the derogation.
The last issue to address is the central one of inflation. The drop in energy and oil prices, linked to the slowdown in the world economy, could further slow down the path towards a return to normal prices. Indeed, according to analysts, the ECB will have to revise upwards the time needed to reach the 2% target and therefore continue to focus on the Qe programme.
