ECB reference to exchange rate could help deflate EUR
We expect the tone of today’s ECB press conference to remain dovish despite the improvement in the eurozone economic data. Recent comments from ECB President Draghi and other policymakers suggest they are still cautious on the recovery, while the tightening in money market conditions remains an on-going concern, even if at current levels of EONIA (still very close to the 0% deposit rate) there is little immediate pressure to act. A new factor for the ECB to consider is the exchange rate, which has strengthened since the last meeting. In fact, the nominal trade-weighted EUR is above the levels seen in February when the ECB formally introduced the reference the exchange rate risks for inflation in its statement. A similar message today should weigh on EURUSD. Elsewhere, our base-case scenario is that the Letta government survives a no-confidence vote in the Italian Senate today, but a reconstituted coalition will remain fragile and risks of early elections remain elevated.
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BNP Paribas