Inflation in the euro zone is falling and the economy may be in a shallow recession, so traders are not convinced by the ECB's argument that interest rates will stay high for some time.

Ed Hutchings, head of rates at Aviva Investors, said: "The biggest challenge will be trying to get a handle on the extent and speed of rate cuts that are priced in."

Here are five key questions facing the market.

1. What can investors expect this week?

The ECB is likely to be satisfied that inflation, which exceeded 10 per cent last year, is close to its 2 per cent target.

Jens Eisenschmidt, a former ECB economist who is now chief European economist at Morgan Stanley, said: "They may even significantly lower the language on the likelihood of further rate hikes." So they're going to say to the market: this is probably the case, this is the peak."

But don't expect European Central Bank President Christine Lagarde to look dovish after this; Analysts believe she will not want to further fuel expectations for easing.

2. Has the ECB beaten inflation?

The signs are certainly positive. Eurozone inflation fell to 2.4 per cent in November, below expectations for the third month running, and even core inflation, which excludes volatile food and energy prices, fell sharply to 3.6 per cent.

"The inflation picture is much better than the ECB forecast," said Raphael Gallardo, chief economist at Carmignac.

However, inflation is expected to rise again as subsidies that protect consumers from high energy prices expire and wage growth remains high. So the ECB is reluctant to declare victory just yet.

3. Who is right about interest rates - traders or the ECB?

Traders now expect the ECB to cut rates by more than 130 basis points starting in March. When the ECB last met on Oct. 26, markets expected a 70 basis point rate cut from July.

Even European Central Bank Executive Board member and prominent hawk Isabel Schnabel added fuel to the fire when she told media the ECB may not consider further rate hikes and should not be guided by stable rates until mid-2024.

But with the ECB almost certainly not supportive of market pricing due to concerns about inflation risks, many economists think a March rate cut would be premature.

"I would expect a cautious, conservative and mildly hawkish reaction to the recent dovish market repricing," said Reinhard Cluse, chief European economist at UBS.

4. What is the final development of PEPP?

Lagarde recently said the ECB would "probably" discuss ending reinvestments under its €1.7 trillion coronavirus emergency purchase program (PEPP) before the current end-2024 deadline, so the topic is likely to come up this week.

The main beneficiary, Italian bonds, performed strongly in November, sharply narrowing their risk premium over German bonds. But analysts said it also bolstered the case for an early end to reinvestment.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, estimates Italy will lose about 15 billion euros in cash if the ECB stops reinvesting in June, while Italy will sell more than 350 billion euros in bonds next year.

Ducrozet believes that such a small amount is not worth the risk of market volatility. However, BNP Paribas expects the ECB to start formal discussions on ending reinvestments.

"This decision may show how much influence the hawks still have," Ducrozet said.

5. What will the ECB's new forecasts show?

Analysts widely expect the ECB to cut its growth and inflation forecasts for next year, raising the possibility of easing its hawkish guidance, with inflation expected to be around 2 percent in 2026.

With inflation significantly lower than expected, the ECB's latest staff forecasts, which will include a forecast for 2026 for the first time, are getting a lot of attention.