The policy decision later should be a more straightforward one. There will be no changes in the key rates and the language and forward guidance will be similar to what we have gotten in December last month. There will not be any surprises on that front and that means the focus and attention will be on Lagarde's press conference instead. So, what can we look forward to?
To keep things short, I only see two likelihoods in which there will be a notable reaction in markets.
The first would be Lagarde going on record to rule out rate cuts for March and April. As things stand, traders are not eyeing a move in March but are pricing in ~71% odds of a 25 bps cut in April.
Lagarde can point to a number of factors here such as developments in the Red Sea, wanting to wait on the outlook for wage pressures, and even just alluding to the fact that they're not satisfied with the disinflation narrative just yet. On the final point, it will mostly come down to her tone.
What makes this an option and arguably the best outcome for the euro currency and for higher yields, is that Lagarde has to be rather explicit about it. Any ways in which she is viewed to be more timid would quickly withdraw the above playbook.
The second likelihood will be Lagarde deciding to be vague and leave open the door for a rate cut in March or April. I wouldn't put it past her to do so but that will definitely knock the euro lower and give traders a reason to look to fully price in a move for April once again. Risk assets should also get a slight lift if Lagarde does decide to pursue this route.
All that being said, the most likely scenario is one that sees a rather dull reaction in markets. It is the case where Lagarde just mostly talks about being data-dependent and offers some light pushback to the current market pricing. She won't explicitly rule out a rate cut as early as April but is likely to say that such a move could be fitting "by the summer".
At the same time, she is to acknowledge better inflation developments in recent months but will argue that the job is not done and price pressures could be a bit more resistant for the time being.
That will maintain the status quo that we're seeing and force traders to wait on the March meeting before taking stock of the ECB outlook again.
