ECB distances itself from any fiscal tightening; EUR loses ground against USD; Eurozone inflation data worsens.

The European Central Bank recently published the minutes of its monetary policy meeting, which show that the bank’s policymakers supported the decision to continue with an accommodative monetary policy approach until March 2022.

The committee also expressed concern about the future of the eurozone economy, as it expects the economy to return to pre-crisis levels by mid-2022.

European Central Bank President Christine Lagarde recently warned against stopping stimulus measures now that an economic recovery is in sight.

“Any tightening would be very unwarranted at this time,” she noted, adding that it could lead to “very serious risks.”

The Eurozone continues to struggle with inflation and the effects of exchange rates on it. The recent strengthening of the euro worries policymakers as it makes exports more expensive and hurts local producers.

“It was highlighted that the nominal effective exchange rate is currently at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook,” the ECB’s Monetary Policy Committee said in its minutes.

The eurozone economy is expected to grow by 5.3% this year as many expect the economy to return to normal now that the vaccination campaign is underway.

The ECB’s monetary policy committee is due to meet next Thursday.

This week the markets learned some relevant information about the state of the European economy. On Wednesday, Eurostat reported that industrial production was 2.5%, compared with October’s 2.3% and expectations of 0.2%. It fell 0.6% year-on-year, beating expectations of 3.3% and down 3.5% from the previous month.

So far this week, the euro is down 0.63%, snapping a two-week winning streak.

Many are linking this sudden weakening of the euro to the recent strength of the US dollar as markets expect President-elect Joe Biden to announce a very ambitious fiscal stimulus package. Those expectations sent traders rushing from bonds to stocks and the dollar.

“With births really struggling, there is an argument that we could push for a higher number of stimulus,” commented an analyst at OANDA. “Ultimately, markets expect us to see more stimulus than expected in Biden’s first 100 days, which is why we see the dollar holding.”

As we mentioned earlier, European policymakers have been very concerned about the recent appreciation of the euro because it poses a problem for exporters. Many speculate that this opens the door for forex intervention, although it is unclear whether such a move is likely at this point.

Inflation data has worsened since our last report. Year-on-year, the consumer price index fell by 0.3%, which is more than the expectation of -0.2%. In monthly terms, the Consumer Price Index remained in line with expectations at -0.3%.

Inflation remains too low, considering that the European Central Bank is aiming for a 2% inflation level.

The unemployment rate improved to 8.3% in the latest reading, better than expectations of 8.5%.

Gross domestic product figures have remained unchanged so far.

Basic chart

Source Link