The release of the ECB’s January meeting, yesterday, shed more light on concerns held by the bank.
Acknowledging the severity of the recent downturn, the ECB said it will monitor “the extent to which the weaker growth momentum might turn out to be more persistent than currently envisaged.”
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The minutes added that the ECB felt:
“More information, including the March projections, was needed to deepen the analysis and obtain greater clarity before conclusions could be drawn about the medium-term inflation outlook.”
ECB To Lower Inflation Forecasts?
This last sentence seems to suggest that the ECB is preparing to lower its inflation forecasts at the upcoming March meeting. This is in line with the downward trend we have seen recently, and the persistence of factors such as weak oil prices and reduced global demand.
In terms of risk factors, the ECB also noted “the transmission of higher wages to consumer price inflation” saying “there had so far been little response in underlying inflation measures to improving labor market conditions.”
However, policymakers judged that “more structural or longer-lasting factors might still be at play, for example, related to changes in the competitive environment.’”
Inflation Expectations Have Weakened
The minutes also noted that “recent developments in longer-term inflation expectations” had fallen, as indicated by “market-based and survey-based measures.”
Finally, the minutes added that “short-term outlook for inflation had weakened due to lower oil prices and weak developments in domestic services prices.” They noted the ECB’s fear “that there might be a risk that this renewed weakness could start to weigh on inflation expectations if it were to persist.”
In all, the minutes release was mainly dovish. It compounded the view expressed by the ECB at the January meeting and encouraging the view that the ECB will lower its inflation forecasts in March. This should further push out rate hike expectations, weighing on EUR.
Above here, focus will be on a move up to the next area of structural resistance between 11670.1 – 11763.1 with the 50% retracement coming in toward the top of that range.