Research Team at BBH, suggests that the ECB meeting is the center of attention this week and a combination of renewed deflation (-0.2% year-over-year February CPI and 0.7% core rate), weakening economic data, and guidance by Draghi has fanned expectations that ECB will extend its unorthodox policies. Key Quotes “The market is cautious after being disappointed with a 10 bp rate cut and extending the asset purchase program by six months (~360 bln euros of purchases). There are two main questions. What will the ECB do and what will be the economic and financial impact? The market seems to feel most confident that the deposit rate will be cut by at 10 bp, and a tiered system that will ease some of cost to banks, which for the most part is not being passed on to retail accounts. The derivatives markets indicate there are some expecting 15-20 bp cut. However, if this is all the ECB does, investors will likely be disappointed. To get ahead of the curve of expectation, the ECB must do more. The purchase program can be extended for another six months. The end date is soft in any event, and the cost, of suspending it altogether, is that it denies a signaling channel. Increasing month purchases from 60 bln euros might have the biggest impact on market sentiment. This would raise new questions about the sustainability (e.g., are there sufficient German securities?). The purchase program itself can be adjusted in various ways. A new asset class may be considered, such as private sector bonds. As the single supervisor over systemically important banks, the ECB is in a position to buy bank bonds, but this appears to be particularly controversial, and instead, some suggest the ECB could buy non-financial corporate bonds. There has also been some talk of the possibility of a new long-term repo operation (LTRO). We do think this is very likely, but it illustrates the markets sense something has to be done. The current unorthodox mix includes a minus 30 bp deposit rate, purchases, have been extended six months longer than initially projected, and the 60 bln euros a month pace (program size ~14% of GDP) is still insufficient to boost inflation or stronger growth. Since February 11 when the markets turned, the euro fell from $1.1375 to $1.0825, before in the second half of last week. The 5.5 cent slide brought the euro to the lower end of its previous range and the momentum stalled. Technically, there is scope for additional euro gains in the first part of next week.” For more information, read our latest forex news.