EUR/USD: ECB to underpin the euro, inflation to be played down for now – MUFG

EUR/USD is clinging to the 1.22 area after an upward move on Tuesday as inflation moved to 2% in the eurozone. Economists at MUFG Bank expect the pair to be supported by the European Central Bank in this context of above-target levels of inflation.

ECB set to mimic the Fed for now

“High levels of inflation beyond the desired target level is now a fact for the ECB as well after yesterday’s flash CPI print for May revealed a jump to 2.0% from 1.6% in April – above the official target of “close to but below 2.0%”. For now there is no issue here – the ECB has already indicated that it will look beyond the temporary spurt in inflation being caused by base effects and the unusual impact of a sudden reopening of economies after lockdown.” 

“Price pressures are set to build further over the coming months. That’s when a greater degree of divergence will potentially become more evident between the ECB and the Fed. The ECB’s formal policy mandate has not changed whereas the Fed’s has through its announcement last year. That will inevitably bring with it evidence of greater resistance to letting inflation run hot like the Fed will be able to do.” 

“The ECB is undergoing its own policy review with the conclusions due around the end of the year but we are not convinced the ECB will follow the Fed’s lead and move to an ‘average inflation targeting’ regime. Removing the symmetric downside bias to the definition of price stability might be all we get from the ECB which will result in an inherently more restrictive bias to policy in Europe. That expected outcome will help provide support for EUR/USD going forward as we go through this period of above-target levels of inflation.”