By Dhara Ranasinghe, Ritvik Carvalho and Tommy Wilkes
LONDON (Reuters) - The ECB meets on Thursday against a backdrop of concern about a global trade spat and a softening in euro zone economic data that could potentially hamper the central bank's plans to unwind its extraordinary monetary stimulus.
In March, the European Central Bank dropped a long-standing pledge to increase its bond buying if needed, taking another small step in weaning the euro zone economy off protracted quantitative easing (QE).
Just how much recent economic and international developments are impacting the ECB's plans to unwind QE could well make for a lively debate. Here are some of the key questions on the radar for markets.
1/ Will there be changes to forward guidance?
Probably not. Having taken another baby step last month towards unwinding the 2.55 trillion euro ($3.15 trillion) asset purchase scheme, the ECB is not expected to make any changes to its policy outlook on Thursday.
Still, discussions to future tweaks to the so-called forward guidance, which includes the ECB's outlook on asset purchases and interest rates, could be on the agenda. The ECB is seen on track to wind up QE by year-end.
"It's in the ECB's interest to say and do nothing," said Pictet Wealth Management economist Frederik Ducrozet. "We know communication changes are coming but the risk-reward is in favor of waiting until June or later before announcing next steps."
The ECB's QE program: https://reut.rs/2HezxZQ
2/ So can we expect a hawkish or dovish ECB?
More likely dovish than hawkish. Worries about a firm currency, a possible U.S.-China trade war and economic momentum slowing suggest ECB chief Mario Draghi is likely to sound a cautious note at the post-meeting press conference.
The ECB was quick to distance itself from recent comments by policymaker Ewald Nowotny that he would have "no problem" with lifting the deposit rate up 20 basis points to get rate hikes rolling.
Money market pricing suggests investors have pushed expectations for a rate rise further into 2019 and talk in January that the ECB could wind up QE in September when asset purchases are scheduled to end has proved short-lived.
ECB deposit rate - Reuters Poll: https://reut.rs/2J7DhwS
3/ How concerned is the ECB by a global trade war?
The risk of a full-fledged trade war between the United States and other major economies was on the ECB's worry list last month and is likely to feature prominently once more.
For investors, the key question is whether the ECB's carefully calibrated exit plan from its ultra easy policy could be scuppered by trade tensions, especially if the dispute between the United States and China sucks in the euro zone.