THE TAKEAWAY: ECB forecasts further losses and lower inflation -> Report echoes Draghi’s plan for bond purchases -> Euro trading lower
After lowering its forecasts for Euro-zone growth and inflation, the European Central Bank said it may undertake outright open market operations, implying a follow up to President Draghi’s possible bond buying program.
The editorial in the report called on governments to stand by their commitments and activate ESM/EFSF purchases in the bond market when necessary, and said the ECB may also take open market operations, even non-standard monetary policy measures. Again, this may imply the purchasing of bonds of struggling countries, in hopes of lowering the governments’ borrowing costs.
The ECB forecasted the 2012 GDP at -0.3%, down from previous estimate of -0.2%, a 0.6% growth in 2013, down from a previous estimate of 1%, and a 1.4% growth in 2014. The bank also forecasted 2.3% inflation in 2012, and 1.7% inflation in 2013, down from a previous estimate of 1.8%.
The ECB further said that risks surrounding the economic outlook point to the downside, the risks are caused by the instability of particular countries and the rising energy prices. The report also echoed Draghi by stating that the Euro is irreversible.
The Euro dropped to new session lows after the report was released. The most recent drop continues losses that started earlier in the session and therefore may not be a reaction to the release but rather a continuation of a session trend. The pair has traded in an uptrend over the past two weeks, and support might be found around 1.2326, by a month-long resistance turned support line.
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