ECB Quick Analysis: Three dovish changes hit EUR/USD, more could be in store

  • The European Central Bank will allow for a temporary overshoot of inflation. 
  • No tightening is on the cards before the ECB forecasts short-term 2% price rises.
  • The bank will also consider core inflation, another material shift. 

Promises made, promises kept – European Central Bank President Christine Lagarde has delivered a dovish policy shift, exceeding market expectations and defying hawkish members. That should keep EUR/USD depressed even if the dollar remains on the back foot.

Here are the three major changes:

1) Temporary overshoot of inflation

This may also imply a transitory period in which inflation is moderately above target

This sentence in the ECB's statement is hard to swallow for hawks on the Governing Council, especially the German ones. The bank is officially allowing inflation to exceed the 2% target. 

While the ECB's strategic review already moved toward a symmetric inflation target of 2%, adding this line to its immediate policy rather than the high-level strategy is a material change. Allowing an overshoot in price rises means lower interest rates – and more bond-buying – for longer. 

2) The white in inflation eyes

While the Fed wants to see inflation in the rearview mirror before considering any action, the ECB has a more modest target – at least forecasting that price rises hit that target in the short term. Staff forecasts have consistently projected sub-2% inflation for all timeframes. Here are the bank's words, emphasis added:

the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon

Moreover, it not only wants to forecast its target in the near future but wants projections for the remainder of the horizon – three years – to consist of accelerated price rises. That is similar to the Fed's "sustainable" target. Without these two conditions, rates will be glued to zero – another euro-negative move.

3) Core counts

While the strategic review left the headline Consumer Price Index (CPI) as the preferred metric – contrary to the Fed's focus on core prices – the ECB is taking changes in non-volatile components into consideration. 

judges that realised progress in underlying inflation is sufficiently advanced

After recovering from the pandemic lows, Core CPI has hit 0.9% YoY in June and nearing 2% seems like a pipedream. 


The ECB delivered a dovish shift that should keep interest rates depressed for even longer than expected. The initial falls in EUR/USD could be only the beginning. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD hovers around 1.1900, retains weekly gains

The EUR/USD pair trades around the 1.19 mark after the Eurozone Q2 Prelim GDP beat estimates with 2% while US PCE inflation rose by less than anticipated in June, printing at 3.5% YoY. Risk-on mood persists.


GBP/USD retreats after flirting with 1.4000

GBP/USD retreated from near the 1.4000 level, but the greenback remains away from investors' radar. Optimism over the Brexit issue and the declining trend in new COVID-19 cases in the UK offers support to the pound.


XAU/USD slides to $1,820 area, downside seems limited

Gold traded with a mild negative bias around the $1,825 region, or daily lows, during the early North American session, albeit lacked any follow-through selling.

Gold News

Shiba gets listed on eToro as demand for SHIB skyrockets

Leading investment platform eToro has been adding cryptocurrency assets on popular demand from users. The Dogecoin killer recently amassed 600,000 holders despite range-bound price action. 

Read more

NIO shares rise again as Wall Street shrugs off recent China woes

NYSE:NIO added 1.86% as EV and China stocks bounced back again. Nio rides higher as industry leader Tesla gets some major upgrades. Nio rival XPeng releases a refreshed look for its compact SUV.

Read more