A 10 bps reduction in the deposit facility rate is 100% priced in
The odds of that has been fully priced in since 31 July but market pricing towards a 20 bps rate cut has been rather aggressive since then - ECB Rehn's comments about stimulus last week also played a part in that regard.
As of last Friday, odds of that grew to as much as 53% before reports of Germany possibly looking to spend reduced bets to ~30% currently.
The final inflation report for July was pretty much similar to the flash reading but the headline annual inflation reading was revised a little lower. If anything else, that just increases pressure for the ECB to not hold back on stimulus measures next month.
So, what are the stimulus measures we can expect from the ECB?
It's a similar case heading into the July meeting but just that this time we're going to approach the September meeting with heightened expectations.
As such, we can expect a deposit facility rate cut (I reckon 10 bps to start off), followed by the introduction of rate tiering (to alleviate pressure off banks), and a restart of QE (at a later date, in order to work out details on the issuer/purchase limit).
All that will be great to boost hopes for a recovery in the region's economy and inflation on paper but I reckon monetary policy transmission will not be as straightforward.
The global economy is still going to continue to weaken in the coming months amid ongoing trade tensions and a massively struggling manufacturing sector. Europe will not be immune to that, as much as the ECB tries to prevent the contagion.
Without fiscal stimulus, there's just too much weight put on the ECB's shoulders to carry the economy with tools that are not massively effective - as we have seen in the past.
If Lagarde's appointment fails to bring together fiscal and monetary policy to save the euro area economy, then the dark clouds surrounding the outlook for Europe may never go away.