Euro dips after report claims ECB to cut inflation outlook

REUTERS
LONDON
Published 07.06.2017 22:11

The euro fell more than half a percent yesterday after a report suggesting the European Central Bank, rather than swinging decisively towards a tighter monetary stance this week, is preparing to cut its outlook for inflation.

The single currency had recovered almost 10 percent against the dollar in the past five months, benefiting from broad greenback weakness but also on the view that rising inflation would prompt the ECB to raise interest rates in early 2018.

But with global inflation pressures waning, and with euro zone data coming in weaker in recent data releases, that view has started to shift, and the ECB is not expected to signal a change in policy at its meeting this week.

Bloomberg, citing unnamed euro zone officials, said the central bank's staff forecasts for inflation for the next three years had been cut to 1.5 percent, from 1.7 percent, 1.6 percent and 1.7 percent, respectively in March.

Those have still to be approved by the two-day meeting of the Governing Council that started yesterday the news agency said, but, if true, would be a signal of a softer line than many in currency and bond markets have been expecting.

The ECB declined to comment on the report. "If you downgrade your inflation forecasts the next year you're basically sending a message to the market - ‘We're not in any rush'," CMC Markets' chief markets analyst, Michael Hewson, said.

"The ECB doesn't want a strong euro so what better way of pushing it back down against a weakening dollar and pulling the rug out from any potential hawkishness at tomorrow's meeting. They've basically lowered expectations." The dollar rates compare with a seven-month high of $1.1285 hit last week.

The moves also came as the dollar recovered some of this week's more than 1 percent loss against the yen, due largely to broad nerves over the pace of U.S. growth and government policy that have cut U.S. Treasury yields to the lowest since November.

Traders remain cautious before Thursday's UK election, which some worry may be far closer than some polls indicate, as well as the U.S. Senate testimony of James Comey, the former FBI chief sacked by President Trump. The greenback fell as low as 109.115 yen, its weakest since April 21, before recovering to stand flat on the day at 109.49 yen.

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