ECB President Christine Lagarde is set to face her first true test as head of the European Central Bank. Lagarde assumed her role late last year from former ECB President Mario Draghi, who steered the Eurozone economy through the global financial crisis, and infamously stated that the ECB will do “whatever it takes to preserve the Euro.”

Now, it appears that the ECB and its Governing Council will be forced to weather another economic storm ignited by the novel coronavirus outbreak (COVID-19). The accelerating coronavirus pandemic has infected Italy – the world’s eighth-largest economy and third-biggest contributor to total EU GDP – at an exponential rate recently and has triggered a countrywide quarantine.

That said, amid the growing coronavirus pandemic that is plaguing an already weak Euro economy, will Lagarde carry the torch of her predecessor and communicate willingness to do ‘whatever it takes’ at the upcoming ECB meeting announcement due Thursday, March 12 at 12:45 GMT?

Or, in light of limited monetary policy capacity, will the European Central Bank defer to EU governments to stunt economic fallout stemming from the spread of COVID-19?

EUROPEAN CENTRAL BANK FACES PLUNGING EUROZONE INFLATION EXPECTATIONS

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The governing mandate of the ECB and its main objective for the Euro-system is to maintain price stability while seeking full employment and balanced economic growth. On that note, and in consideration of cratering Euro-area inflation expectations and mounting downside risks faced by the Eurozone economy, ECB President Christine Lagarde and the Governing Council could be encouraged to ramp up monetary policy stimulus efforts.

ECB MEETING MIGHT REVEAL ACCELERATION IN ASSET PURCHASES, MORE TLTRO MEASURES

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One possibility could be for the ECB to ramp up its asset-purchase program or double down on TLTROs. Currently, the European Central Bank has QE-infinity on autopilot “for as long as necessary” at a rate of EUR20 billion per month. An interest rate cut to the ECB deposit facility rate might be another option, but capacity for ECB rate cuts is quite limited considering the benchmark policy rate already sits at a record low -0.5%.

However, central banks around the world – including the ECB – have increasingly called upon sovereign governments with fiscal capacity to start shouldering some of the stimulus burden. As such, a great deal of uncertainty lingers around the upcoming ECB meeting and interest rate decision. A big question mark also hangs over how the ECB central forecast will change to reflect the Governing Council’s updated expectations for the Eurozone economy.

EUR PRICE OUTLOOK – EURO AT RISK AHEAD OF MARCH 2020 ECB MEETING

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Euro price action consequently appears at risk of experiencing heightened currency volatility – particularly over the next 24-hours – as forex traders react to details out of the March 2020 ECB monetary policy update. This is also suggested by the latest EUR/USD overnight implied volatility measurement of 18.7%, which is the highest reading in nearly three years.

EUR/USD overnight implied volatility of 18.7% ranks in the top 99th percentile of measurements taken over the last 12-months and compares to an average reading of 7.9% over the last five years. This underscores the high degree of uncertainty, or risk, surrounding the Euro headed into Thursday’s trading session and ECB rate decision.

EUR/USD PRICE CHART: 2-HOUR TIME FRAME (FEBRUARY 24 TO MARCH 11, 2020)

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Chart created by @RichDvorakFX with TradingView

Nevertheless, the direction of spot EUR/USD price action could mirror the direction of interest rate differentials between yields on US and Eurozone sovereign debt. Since the coronavirus began wreaking havoc on financial markets late last month, spot EUR/USD prices have closely tracked the spread between ten-year US Treasury yields and an equally-weighted index of rates on comparable ten-year German, French and Italian bonds.