EUR/USD Down on European Commission Economic Forecasts

Talking Points:

- Euro-Zone headed for moderate recovery but headwinds persist.

- Inflation outlook for 2016 lowered to +1.0%, from a prior+1.5%

- GDP to grow +1.8% in 2016, down from prior+1.9%.

EUR/USD dropped more than 0.15% (at the time this report was written) after today’s economic forecasts release by the European Commission (EC). The EC publishes its forecasts three times a year: in February, May and November. The forecasts for the Euro-Zone takes aggregate data fromEU member states, and covers about 180 variables.

The commission kept its inflation outlook for the Eurozone unchanged for 2015 at +0.1%, but lowered the outlook for 2016 to +1.0% from the prior estimate of +1.5%. In 2017, the EC forecasted that inflation will hit +1.6%. It’s important to note here that the ECB’s mandate is to keep inflation close, but under +2%.

The Euro-Zone Gross Domestic Product forecast for 2015 was upgraded to +1.6% from the prior estimate of +1.5%, supported by improving labor-market conditions and higher nominal income. The estimate was lowered to +1.8% in 2016 versus the +1.9% prior estimate. GDP is forecasted to hit +1.9% in 2017.

The commission remarked that the euro area economy is set to continue moderate recovery, supported by low oil prices and weak external value of the Euro; amid challenging global conditions, namely slowdown in emerging markets. The commission noted that unemployment is set to head lower, but continues to be too high, while investment is forecast to strengthen “gradually”. With that being said, the commission further commented that downside risks are still significant.

The release today was in high focus after ECB President Mario Draghi perceived dovish monetary policy press conference two weeks ago, in which he signaled the ECB’s willingness to expand quantitative easing (QE), extend its period and even cut deposit rates further. Draghi said that the ECB will make its decision upon the ECB’s new projections, set to be released on December 3.