Euro falls after ECB cuts inflation forecasts

The euro was volatile on Thursday after the European Central Bank cut its inflation forecasts and said further asset purchases may be necessary.

Although the central bank remained bound to its zero-rate policy and kept QE net asset purchases at €60bn a month, it also continued the process of managing expectations towards eventual policy tightening.

Risks broadly balanced

The ECB suggested the risks to growth were "broadly balanced", but revised down inflation forecasts for consumer prices to average 1.5% in 2017 from previous estimates of 1.7%.

These forecasts eventually sent the euro lower, down 0.4% against the dollar to $1.1216 and falling 0.2% to €1.1533 versus the pound.

Mario Draghi, ECB president: Risks to growth remain broadly balanced - Source: MaxPixel

Forward guidance

Only a very subtle change to the central bank's forward guidance was expected and ECB president Mario Draghi altered the language of the bank's statement, removing reference to possible "lower levels" of interest rates.

Additional asset purchases beyond the scheduled December end to the quantitative easing programme were not ruled out, however.

"Draghi seems to have the great power of disappointing hawks when scrapping dovish comments," said Bert Colijn at ING.

Kathleen Brooks, research director at City Index, added: "As it stands, it makes sense that the euro is at fresh lows of the day even though the ECB seems to have adjusted its forward guidance and ruled out the prospect of further rate cuts."

She continued: "This message has been neutralised by the ECB’s reference that it could continue the asset purchases beyond its current end date if the inflation outlook doesn’t improve in the coming months."

Euro strength

Despite Thursday's losses, the euro remained 7.5% higher against the dollar this year.

These gains that have confused some analysts as the diverging paths of monetary policy between the ECB and US Federal Reserve ought to support the dollar.

While the ECB continues on a broadly expansionary path, the Fed has tightened – raising the main Fed funds rate three times from its historic lows.

Higher interest rates are attractive to yield-seeking investors and recent hikes to the Fed funds rate should have boosted the dollar.

Deutsche Bank analysts believe the euro's rise this year against the dollar is largely due to the unexpectedly robust performance of the eurozone economy and easing political risk.

Strategist George Saravelos said in a client note: "Near-term, it suggests that there may be an underlying flow story that is impervious to other market drivers and is supportive of the euro."

Eurozone Q1 growth revised higher

There was little support for the single currency on Thursday, however, despite upward revisions to eurozone first-quarter economic growth.

In the final reading of gross domestic product for the first three months, the month-on-month rise in growth was revised up to 0.6% from previous estimates of 0.5%.

The annual growth rate was lifted to 1.9% from 1.7% in the final quarter of 2016 – its fastest pace of growth in two years according to figures released by Eurostat. Analysts had expected no change.