President Mario Draghi at the European Central Bank (ECB) will once again face a balancing act when he speaks to the media on Thursday afternoon, with a strong euro scuppering any talk of a quick end to the central bank's asset purchase program.
The ECB's Governing Council is largely expected to upgrade growth forecasts while simultaneously downgrading inflation forecasts. The 2019 forecast for inflation stood at 1.6 percent in June, but this used a much lower assumption for the euro-dollar exchange rate.
Since then, the currency has appreciated nearly 7 percent. According to Bank of America Merrill Lynch, a 10 percent appreciation of the currency shaves off 40 to 50 basis points off medium-term inflation forecasts. As such, the consensus is expecting a downward revision to 1.4 percent or 1.5 percent by the ECB on Thursday.
Downward revisions in inflation forecasts are typically accompanied by additional monetary accommodation, not a withdrawal. And market participants have been anticipating a "tapering" of stimulus for most of the summer. Hence the dilemma.
"We think the key reason for staying put on September 7 is the sharp rise in EUR/USD since late June – a move that the ECB will not want to turbo-charge through additional hawkish rhetoric," analysts at UBS, said in a note on Wednesday.