Over the past few months, the ECB has grown more aggressive in its policymaking to push up inflation. It has slashed interest rates, including its main refinancing rate to zero, and expanded its bond-buying program. Data released by Eurostat on Tuesday showed inflation in the year to May was minus 0.1 percent, up slightly from the previous month's rate of minus 0.2 percent. Inflation in the eurozone remains at historically low levels despite ECB's efforts and that's a worry for those setting monetary policy.
At the minutes of its previous meeting in April, the ECB clearly stated that it would take time for the measures to fully unfold. Hence few experts expect any further action at this Thursday's policy meeting of the ECB's governing council, largely because the more recent stimulus efforts are still working their way through the economy.
Eurozone's economic outlook is improving. Growth in the first quarter was better than expected and the economy has finally returned to its pre-crisis level. Separate Eurostat figures released Tuesday showed unemployment rate held steady at 10.2 percent in April. Further improvements were seen in the labor market, with another 63,000 people coming off the jobless total.
Also, the recent pick-up in oil prices is set to help push the inflation rate above zero as soon as next month. Last week a barrel of crude pushed above $50 for the first time since Oct 2015, extending gains from multi-year lows of 26.03 in Feb. Unless oil prices drop back sharply, headline CPI inflation will undoubtedly climb over the coming months, but core price pressures look likely to remain subdued on weak wage growth.
The ECB will publish updated growth and inflation forecasts at the meeting this week. “We look for an upward revision to the ECB’s projection for headline inflation in 2016-17 due to the higher oil and food prices, but the core inflation forecast will in our view be revised lower over the entire forecast horizon.” said Danske Bank in a report.
Eurozone financing conditions have improved following the easing measures announced at the beginning of March. This has been evidenced by decline in real swap rates during April and May due to higher near-term market-based inflation expectations. From a market perspective, expectations are very low with a zero probability of a 10bp deposit rate cut at the upcoming meeting.
“We expect the ECB to maintain its patient stance at the meeting this week and not send any new signals about more easing. We still believe that the ECB will have to extend its QE purchases beyond March 2017 as the ECB, in our view, will not see inflation at a sustainable path towards 2%.” adds Danske Bank.
EUR/USD was trading around day's highs at 1.1162 at around 1145 GMT. Short term trend is slightly weak as long as 1.1180 (200 day HMA) holds. Any break above 1.1180 will take the pair to next level at 1.12168/1.12427 (May 23rd high).
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