ECB Economic Bulletin Sends a Less Gloomy But Cautious Message

It was a quiet start to the day on the euro area economic calendar. Early in the day, inflation figures from China drew interest. A pickup in inflationary pressure failed to spook investors, with the annual inflation rate up from 1.6% to 1.8%.

Market sentiment toward US inflation and the Fed supported riskier assets ahead of the ECB Economic Bulletin.

ECB Economic Bulletin Talks of a Short-Lived and Shallow Recession

With the ECB delivering its next policy decision in early February, the ECB Economic Bulletin drew plenty of attention. Euro area economic indicators have sent mixed signals, raising question marks over the ECB’s ability to crank up interest rates to bring inflation to target.

Salient points from the Economic Bulletin included,

• At the February 2023 meeting, the ECB will announce the specifics for reducing the APP holdings.
• Following the December interest rate hike, the Governing Council expects to raise them significantly because inflation remains too high, and projections point to a lengthy period of elevated inflation above target.
• Food price inflation and underlying price pressures will persist for some time.
• Eurosystem staff see average inflation reaching 8.4% in 2022 before declining to 6.3% in 2023.
• The euro area economy may contract in Q4 2022 and Q1 2023. However, Eurosystem staff project a short-lived and shallow economic recession.
• Risks to the economic growth outlook are on the downside. The war in Ukraine, a deteriorating global economic outlook, and elevated energy and food prices remain headwinds.
• In contrast, risks to the inflation outlook are titled to the upside.
• The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

Today’s bulletin highlighted the multiple driving forces the ECB needs to consider in bringing inflation to target. A worsening global macroeconomic environment would likely question the ECB’s hawkish policy outlook.

Following today’s bulletin, ECB member commentary would also need monitoring. However, no ECB members are due to speak today, leaving investors to track chatter with the media ahead of the US CPI Report.

EUR/USD Price Action

Ahead of the ECB Economic Bulletin release, the EUR/USD rose to a pre-bulletin high of $1.07753 before sliding to a pre-release low of $1.07454.

Responding to the Economic Bulletin, the EUR/USD fell to a post-release low of $1.07428 before rising to a high of $1.07594.

At the time of writing, the EUR was up 0.01% to $1.07595.

Up Next

It is a busy day ahead on the US economic calendar, with US jobless claims and the all-important CPI report in focus.

Both reports will draw interest. Initial jobless claims at sub-200k and a hotter-than-expected US CPI Report could reignite bets of a 50-basis point Fed interest rate hike in February.

While the numbers will move the dial, FOMC member chatter also needs monitoring. FOMC member Harker speaks today. Hawkish commentary and hawk-friendly stats will fuel demand for the dollar and sink the EUR/USD.