The European Central Bank (ECB) policy meeting and press conference held no surprises yesterday with EUR/USD close to unchanged. Looking ahead, the risks for the pair tilt to the upside, in the view of economists at MUFG Bank.
ECB confirm market expectations but signs of optimism
“The ECB kept the guidance of PEPP purchases being at a ‘significantly higher pace” than in the early months of the year rather than altering the guidance to simply purchases being “maintained around the current pace’, which we would view as giving the ECB less wiggle room to slow purchases later in Q3.”
“While the PEPP guidance was in line with market expectations, the changes that did take place certainly were on the optimistic side. The ECB dropped its downside risk assessment over the near-term to simply conclude risks were balanced while the upgrades to GDP and inflation forecasts were a little stronger than expected.”
“Real GDP this year was revised from 4.0% to 4.6% while inflation was revised from 1.5% to 1.9%; and for 2022 from 4.1% to 4.7% for GDP and 1.2% to 1.5% for inflation. However, those were caveated by the ECB leaving the 2023 forecasts unchanged at 2.1% and 1.4% respectively. So the ECB’s message was clear, the impact on GDP and inflation is transitory limiting the implications from a monetary policy perspective.”
“ The 10yr UST bond yield has now dropped 19.3bps on a closing basis over the last five trading days to yesterday – the largest decline since 2nd April last year. The US-EU 10yr yield spread has fallen notably (12bps) in the same period, to below 170bps for the first time since late February. That leaves the risks skewed to a break to the upside in EUR/USD.”