ECB Says Latest Data "Highlight Prevailing Uncertainty"
THE TAKEAWAY: ECB says economic outlook “uncertain” -> Political developments threaten Eurozone stability -> Euro strength today attributed to market consolidation
The European Central Bank’s monthly bulletin for May cited the “uncertainty” currently prevailing in markets as a major contributor to downside risks. Although it said it expects price developments to remain in line with long-term forecasts, the ECB’s governing council cited the rising threat of inflation in a number of European countries as reason for a cautious outlook.
The ECB said it expects a “gradual recovery” in the Eurozone over the coming year, and cited foreign demand as a major contributor to the recovery process in the 17-member Euro bloc. However, the report also mentioned “tensions” in some Euro area sovereign debt markets and their impact on credit conditions. Spanish bonds in particular have suffered recently as Madrid attempts to push through unpopular budget cutbacks, in an attempt to curb government spending and ease the burden on ailing Spanish banks.
Meanwhile, the recent Greek elections have brought the country’s ability to implement reform into question. Developments in the country remain hazy, and new elections might be on the horizon as consecutive parties fail to form coalitions.
The Euro dropped somewhat following the ECB’s report, and although the EURUSD pair has managed to stay out of the red so far today, recent weakness in the single currency leads us to classify today’s strength as purely corrective.