Next week on Thursday, the European Central Bank (ECB) will have its monetary policy meeting. According to analysts from Danske Bank, the meeting will focus on the financing conditions, PEPP implementation and offer a cautiously optimistic view on demand amid a weak inflation outlook. They see the central bank raising growth projections by 0.3pp for 2021 and 2022. 

Key Quotes: 

“It will be a challenging communication exercise that awaits Lagarde on Thursday next week. We expect that she and the ECB GC will convey a narrative of higher growth, with a still subdued inflation outlook yet at the same time also slow the current PEPP purchases slightly.”

“With the technical assumptions little changed since March (see charts on next page), we expect the ECB new staff projections to paint a brighter economic outlook for the euro area.”

“On the inflation side, things remain more mixed though. Core inflation has been on a declining trend since the start of the year and evidence of cost-push inflation from manufacturing supply bottlenecks has generally been scarce, even for goods. In light of the stronger economic momentum and tailwind from commodity price increase, we see scope for ECB’s forecasts to paint a more optimistic picture of the near-term inflation outlook.”

“We do not expect the ECB meeting next week to prove a major catalyst beyond simply revising growth expectations a tad higher, a theme also recently echoed by OECD. In our view, this will mean little for EUR/USD, which is already standing at elevated levels at 1.22. While we are quite some time from talking about a potential exit of pandemic and maybe even loose monetary policy in the euro area, such a discussion remains a key risk to take EUR/USD higher.”

“In the short-term, markets will likely turn their focus towards the FOMC meeting as the direction of real dollar yields have been key in forming short-term moves in spot dollar, and notably so during 2021. We continue to forecast EUR/USD at 1.15 in 12 months.”

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