"Recent comments from ECB Governing Council members suggest discomfort with the continued rise in the euro. ECB President Draghi was particularly forceful, noting that the strength of the currency was "becoming increasingly relevant in our assessment of price stability" and that the ECB "stands ready to take further decisive action if needed" in the face of downside risks to inflation.
Given last week's unchanged policy decision, market participants may be forgiven for thinking that the lack of such decisive action has been behind the euro's appreciation! But although policy wasn't eased, last week's meeting was important as it established a framework that could justify more easing in the future.
The ECB has just published analysis that allows us to calibrate the likely effect of exchange rate moves on its inflation forecasts. It appears that a 10% rise in the trade-weighted euro would shave over half a percentage point off projected inflation in late 2016. It would only take a further 4% rise in the euro from here to (all else equal) push the ECB's Q4 2016 inflation projection to around 1.5%, a rate that could prompt a policy response.
Assuming a broad-based appreciation, that'd be consistent with EURUSD around 1.44. That may be a sensible level for markets to expect the ECB to back its strong words with action."
Credit Suisse Research Analysts: Christel Aranda-Hassel, Steven Bryc, Mirco Bulega Violante Di Canossa, Neville Hill, and Giovanni Zanni
No comments:
Post a Comment