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Euro rides ECB rumour rollercoaster

The euro has had an eventful time ahead of today’s meeting of the European Central Bank.

The single currency gyrated in afternoon trading yesterday on reports the central bank would make a notable cut to its medium term inflation forecasts later today.

Around 12pm (BST), Bloomberg reported that the forecast would be cut from 1.7 per cent to 1.5 per cent for 2019, attributing it to ECB sources. That duly sent the euro down 0.6 per cent against the dollar to a three-day low.

Within two hours, Reuters reported its own ECB sources saying any trim to the inflation forecast would be small. On cue, the euro erased its losses and is now trading flat this morning at $1.1253.

As it stands, the ECB’s forecast has inflation averaging 1.7 per cent this year, 1.6 per in 2018 and 1.7 per cent in 2019. That medium-term forecast is still below the central bank’s target of just below 2 per cent with any downgrade likely to send a dovish message to investors that the eurozone’s stimulus measures still have longer to run.

The ECB “needs to continue to prepare markets for an end to the QE programme whilst still remaining as dovish and flexible as it can”, according to Richard McGuire, credit analyst at Rabobank.

“At today’s meeting an adjustment of the growth outlook to ‘broadly balanced’ whilst emphasising that downside risks to the inflation outlook remain, would appear to be the middle ground”, said Mr McGuire.

Cathal Kennedy at RBC Capital Markets also expects Mr Draghi to deliver a dovish message with the ECB making only small tweaks to its guidance on the downside risks to the eurozone’s recovery.

Mr Kennedy adds:

The changes in the oil price and exchange rate assumptions underpinning the inflation forecast have been in the public domain since mid-May so the direction of travel in the forecasts, if not their magnitude, have been known for some time now.

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