European Central Bank Revises Forecast for GDP Growth and Inflation

There isn’t much to be surprised about at the European Central Bank meeting. In terms of economic events, the staff revised headline inflation forecasts for this year and 2022 substantially, notwithstanding the belief that recent increases in prices were driven by temporary reasons. All monetary policy instruments remain unaltered. Amid fears about tighter financial conditions, policymakers avoided mentioning the word “taper.”

President Lagarde discussed the observed financial market constriction, citing the bond market sell-off in May as an example, as well as the risk of spillovers to financing conditions for households and non-financial corporations, which had remained relatively stable up to that point. To reconcile this evaluation with the ECB’s action, we must conclude that the ECB chose to maintain the substantially higher PEPP purchase rate primarily due to risk, rather than economic considerations.

The members recognized the recent spike in inflation and blamed it on “base effects, transitory factors, and an increase in energy prices.” They predicted that it will “increase in the second half of the year before falling as transient reasons go away.” Nonetheless, the predictions for this year and next year’s inflation were sharply upgraded by the staff.

Foreign Exchange: European Central Bank Optimism, Well-Priced In

By expectations, the European Central Bank expressed optimism in its growth and inflation forecasts. As has been the case in the past, such optimism is moderately bullish for EUR/USD. Overall, the short-term expectation is that the spot will likely remain in the recent range of 1.20-1.24, and measures of volatility will continue to fall.

The FOMC and PMIs will be the next targets for a spot since they have the potential to take a spot to the end of these intervals (in both directions). Looking ahead, it is estimated that EUR/USD may trend towards 1.15 in the next 12 hours.

The EUR/USD pair moved dramatically during the second half of the day after being calm below 1.2100 during the first half of the day as investors reviewed the European Central Bank’s (ECB) policy pronouncements. The pair staged a rebound after a steep plunge to a six-day low of 1.2144 but lost momentum before rebounding 1.2200. The EUR/USD exchange rate was nearly constant for the day at 1.2175 at the time of writing.