Euro shaky ahead of Thursday's European Central Bank announcement, dollar steadies

The euro EURUSD, +0.0355% sank in response.

Patrick O'Donnell at Aberdeen Asset Management said the easing bias removal was not a great surprise. The central bank has removed any reference to a possible lowering of the interest rate.

Analysts think the bond purchases will be tapered next year, but the bank has moved gingerly in indicating when it might be ready to announce a schedule for reducing and then ending them. In fact, the ECB's forecast for economic growth of 1.8% in 2017, which was previously above consensus, now looks a bit cautious, noted Ben May, lead eurozone economist at Oxford Economics, in a Tuesday note.

Its economy grew by 1.9% on the year in the first quarter, outpacing the U.S. Unemployment has fallen to an eight-year low of 9.3%, bank lending is expanding robustly and business surveys suggest growth is accelerating.

Despite this, the ECB President, Mario Draghi said at his press conference that "deflation risks have definitely gone away".

"Even though it was well telegraphed over the last 24 hours, the future expectations on inflation came in a bit lower than the market had been anticipating", said Dean Popplewell, chief currency strategist at Oanda in Toronto.

Mr. Draghi's message of patience is likely to cause further irritation in Germany, Europe's largest economy, where top officials have been calling urgently for a policy reversal from the European Central Bank. Inflation projection for this year was trimmed to 1.5 percent from 1.7 percent.

Eurostat said the 19-country euro zone expanded by 0.6% quarter-on-quarter and by 1.9% year-on-year.

With Thursday's decision, the ECB's deposit rate, its key policy tool, remains at -0.4 per cent.

The whole premise that the ECB is to raise rates and end its programme of money-printing relies on the assumption that the Eurozone inflation is rising in a sustainable manner towards the Bank's 2% target.

He added that inflation remains subdued. Annual real GDP is expected to increase at 1.9% in 2017, 1.8% in 2018 and 1.7% in 2019. "The pass-through of our monetary policy has never been so effective as it is today".

However, this air of optimism has been punctured by suggestions inflation forecasts are to be downgraded. Mr. Draghi explained that one of the reasons stronger growth isn't translating into higher inflation is a changed jobs market. A break above has the potential to bring more buyers into the market, as this would result in a breakout above the spike high established on November 9th, at the time of the US Presidential election. Asset purchases under the programme are due to continue at least until December at a pace of 60 billion euros per month.

"There is clearly room for another "longer but lower" announcement for 2018 later this year", ING Bank's Brzeski said.

  • Zachary Reyes