Euro weakens on reports of European Central Bank inflation target cuts

Draghi is likely at some point this year to signal that the bank plans to ease off its bond-buying stimulus program, but most analysts do not expect him to do so Thursday.

"We expect Thursday's press statement to reiterate that an "exceptional degree of monetary accommodation" is still needed", said Luigi Speranza, an economist at BNP Paribas told Reuters. At the bank's last meeting in April, Draghi said risks were "tilted to the downside". The council made a small concession to the improving economic backdrop by dropping wording that it could lower interest rates further.

A block-buster week of Political and Central bank risk comes to a head this week with the United Kingdom election and the ECB rate meeting and press conference both due on Thursday.

In its carefully-weighed policy statements, the European Central Bank has long warned of risks threatening the eurozone recovery.

While London's main FTSE 100 stock index ended the day flat, the larger FTSE 250 shed almost 1.1 percent amid recent tightening in opinion polls between Conservative Prime Minister Theresa May and main opposition Labour leader Jeremy Corbyn. In particular, core inflation, which excludes volatile prices for fuel and food, remains stuck at 0.9 percent.

Draghi said inflation indicators "have yet to show convincing signs of a pickup". Our view on the Eurozone yield curve is essentially a belief that the European Central Bank will play catch up with the Fed in the next year, while the Fed may take a prolonged pause on its rate hiking cycle after its expected June rate hike.

With growth in the 19-nation eurozone at a healthy 0.5% in each of the past two quarters, most observers believe the time has come to be less tentative.

Nevertheless, such a move would not herald a quick exit from bond-buying. The 60 billion euros ($67 billion) per month in bond purchases are to run at least through the end of the year. "They've basically lowered expectations".

The emphasis the European Central Bank puts on its role implies that it believes growth isn't yet strong enough for it to start dialing back on the bond-buying stimulus program it has been running since March 2015.

The ECB's hawkish camp, which includes the governing council's German membership and board member Benoit Coeuré, has long argued that the council should tweak its message on the euro zone's economic outlook.

Ending the bond purchases and raising interest rates could have wide-ranging effects, such as a stronger euro and higher interest costs for heavily indebted governments.

Meanwhile, pressure from politicians in fiscally conservative countries like Germany is mounting over low inflation's impact on savers.

Speaking in Estonia, the bank's president Mario Draghi said there was now "a stronger momentum in the euro area economy" and said "the programme was running smoothly".

And technical considerations could soon limit the number of government bonds available for the European Central Bank to buy, cramping the programme's effectiveness.

  • Zachary Reyes