Big Day Ahead Of The Euro – What To Expect From ECB

Euro has a big day ahead with a monetary policy announcement and U.S. inflation report on the calendar. Between these two events, the European Central Bank meeting is generally more market-moving but the U.S. dollar shot higher at the equity open, recovering earlier losses ahead of CPI release. There’s little doubt that inflation is on the rise but the Federal Reserve has made it very clear that they see this increase as temporary. With retail sales and non-farm payrolls falling short of expectations, effectively justifying the central bank’s caution, a strong inflation report won’t increase the chance of taper talk in June. USD/JPY may get a boost from a good number but its gains should be limited ahead of next week’s Federal Reserve meeting.

Bank Note, Euro, Bills, Paper Money

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The euro moved quietly higher ahead of the European Central Bank’s monetary policy announcement which tells us that investors are hoping for optimism. Economic projections are scheduled for release and a lot has changed in the past 3 months. During this time, the regional and global recovery solidified and the outlook for the Eurozone economy firmed. Inflation also increased across the globe with many experts casting doubt on the Fed’s view that the uptick in inflation will be temporary. The question for the ECB tomorrow is whether the growth and inflation outlook are strong enough for the central bank to talk taper.

Fundamentally the Eurozone’s outlook is very bright but the ECB is supposed to act on actual data and not data expectations. The problem are recent data disappointments. The decline in factory orders and industrial production in April follows weakness in retail sales, the ZEW survey, and PMI. The decrease in the expectations component of ZEW was particularly surprising given recent re-openings. The ECB may opt to avoid taper talk until data catches up with expectations. German bond yields and the euro are strong and by initiating the discussion prematurely, they risk setting back the recovery.

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