Inflation Pick-Up Contingent on Loose Monetary Policy: ECB’s Praet
- Need to be patient to see inflation converge towards objective.
- EUR/USD heads lower on ECB comments and higher US bond yields.
Remarks by Peter Praet, member of the executive board of the European Central Bank, nudged EUR/USD lower Tuesday, although trading remained thin due to the American Independence Day holiday. Mirroring recent commentary from ECB president Mario Draghi, Praet said that inflation still remained stubbornly low and that the current loose monetary policy was still necessary. He said that while economic prospects brighten, accommodation is still needed to make sure inflation sustainably converges towards the ECB’s mandate of below, or close to, 2% over the medium term.
“We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data. The euro area’s economic environment is improving, and the fat negative tail to inflation expectations, which was so visible at the start of our asset purchase programme, has virtually disappeared “
Praet finished his speech highlighting the need for persistence because the baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, “depend on the current accommodative monetary policy stance.”
The single currency edged lower after the speech although the move was limited with the US closed for Independence Day. The single currency looked set to fall for the fourth day in a row against the USD, especially after recent strong economic data pushed US Treasury yields even higher. The yield on the interest-rate sensitive 2-year UST remained around 1.415%, near highs last seen in November 2008.
Chart: EURUSD Daily Timeframe (March 9 - July 4, 2017)
And one section of the market will hope that the EUR continues its move lower, with IG Client Sentiment Data showing that retail are short of EURUSD by 74% to 26%, giving traders an opportunity to close out their positions. This data however is normally seen as a contrarian indicator, meaning EURUSD is likely to push higher.
For traders looking for a slightly longer-term outlook on the EUR, please see the DailyFX 3rd Quarter OutlookHere.
--- Written by Nick Cawley, Analyst
To contact Nick, email him at email@example.com
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