THE TAKEAWAY: ECB lowers GDP forecast, but predicts an imminent recovery -> ECB predicts steady inflation for medium term -> Euro trading steady

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The European Central Bank lowered its GDP forecast in its monthly bulletin in August, but the central bank said it sees a gradual recovery occurring in the rest of this year and continuing into 2014. The ECB predicted 0.6% economic contraction in 2013, down from a previous forecast of 0.4% contraction, and predicted 0.9% economic expansion in 2014, down from 1%.

The ECB said it expects inflation to remain below but close to its 2% target for the medium term, allowing the central bank to maintain an accommodative policy in the current times of weak economic growth. The ECB lowered its inflation forecast for 2013 and 2014 to 1.5% from 1.6% and 1.7% respectively.

The forecasts were similar to President Draghi’s comments from earlier in the month, when he said that rates will remain at the current levels or lower, and the region is past the worst of the current recession. Euro traders are watching to see if Draghi is actually going to use any of the unconventional monetary tolls he mentioned in June, or if the central banker is engaging in a form of “verbal stimulus” to help achieve his goals without the risks of an unconventional tool, like negative deposit rates.

The Euro did not react significantly to the bulletin, but EUR/USD has continued a rally from mid-July which has covered 500 points thus far. The pair may next see resistance by a five month high currently sitting at 1.3416, and a broken resistance line around 1.3250 may now provide support.

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EURUSDDaily: August 8, 2013

ECB_Calls_for_Accommodative_Policy_on_Lower_Growth_Steady_Inflation_body_eurusd_daily_chart.png, ECB Calls for Accommodative Policy on Lower Growth, Steady Inflation

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to .