As expected the European Central Bank left interest rates on hold and offered no new insights into when its asset purchase programme will end. There was no surprise here with the October taper announcement setting the tone for the ECB until early 2018. Only then will we begin to see some discussion about whether QE should remain open-ended or should have a firm stop date.

Forward guidance stuck to the script, with the ECB saying that it expects interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. It also retained the guidance that the Governing Council is ready to increase the asset purchase programme in terms of size and/or duration. 

What we got was a more bullish assessment of growth in the Eurozone, coupled with a slightly more upbeat outlook for inflation. And yet for all that the ECB thinks core inflation will improve, it’s still forecast to be well short of the 2% target by 2020. So while the economic outlook is strong there is little sign that the ECB will seek to tighten more quickly than current market expectations suggest: no rate hikes until 2019.

Mario Draghi said he had greater confidence that inflation will converge with inflation aim, but stressed that domestic price pressures remain muted and have yet to show convincing signs of a sustained upward trend.

The outlook for growth revised up substantially from the September projections:

Growth forecast:

2.4% in 2017 (v 2.2%)

2.3% in 2018 (v 1.8%)

1.9% in 2019 (v 1.7%)

1.7% in 2020

But given the recent strong economic data from the Eurozone – for instance today’s PMI figures – this is no major surprise and has been well priced in by forex markets. The lack of any further upside for the euro despite the now steady stream of strong data seems based on the assumption that the ECB will remain on the dovish side and is not prepared to risk raising rates too quickly even if growth starts to beat forecasts. And that view is cemented by the inflation forecasts, which although revised higher, still show HICP undershooting for a further three years.

Inflation forecast:

1.5% in 2017 (unchanged)

1.4% in 2018 (v 1.2%)

1.5% in 2019 (unchanged)

1.7% in 2020

While there was chatter ahead of the meeting about the publication of 2020 projections for the first time, it’s worth remembering central banks don’t have a great record at predicting where inflation and growth will be three years ahead.

All of this left the euro lacking direction and indeed tilted marginally to the downside, with EURUSD retreating to find support at $1.1800. With the Fed and ECB packing up for Christmas there seems little fresh direction in the coming month or so. EURUSD looks likely to stay range bound in the area between $1.5500 and $1.19500, where it has been stuck since the last week of September.


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