EUR/USD to advance nicely on a mix of a non-scary CPI and upgraded ECB growth forecasts

EUR/USD has been edging lower as investors fear higher US inflation. At the same time, the ECB is set to leave its policy unchanged and upgrade its forecasts. First down, then up? Yohay Elam, an Analyst at FXStreet, explains the playbook for the ECB and CPI storm.

See – European Central Bank Preview: Forecasts from 13 major banks

Tapering of bond buys is high on the agenda

“After Nonfarm Payrolls fell short of estimates, a not-so-horrible inflation figure could convince markets that the Fed is on course to sustain its $120 billion/month purchases untouched. More greenbacks mean a weaker currency.”

“The European Central Bank is forecast to leave its policies unchanged on Thursday – the deposit rate at -0.50% and the total of its Pandemic Emergency Purchase Program (PEPP) at €1.85 trillion. However, there is an open question about the current pace of buying. Return to a normal pace of purchases could boost the euro, but there are reasons to expect the ECB to continue supporting the economy.”

“The ECB announces its decision at 11:45 GMT, and if it refrains from cutting back on purchases, the euro could dip. At 12:30 GMT, the US publishes its CPI data, and Lagarde kicks off her press conference. A mix of a non-scary inflation figure and upgraded ECB growth forecasts could trigger a bounce in EUR/USD.” 

“While these are the main events of the day and the week, it is essential to note that leaders of the G-7 convene in London and any surprising announcement from President Joe Biden and others could rock markets. However, the leaked communique suggests no market-moving declarations are on the cards.”