French politics and Fed are important drivers for EUR/USD - Nomura

Analysts at Nomura explained that the ECB’s near-term forecast was more optimistic, as expected, but importantly, its 2019 CPI inflation forecast remains unchanged at +1.7%.

Key Quotes:

"Its near-term CPI forecast was much stronger than we expected (+1.7% in 2017). Nonetheless, the ECB’s policy stance remains unchanged, and President Draghi repeated that the ECB sees rates at present or lower levels well past the end of QE. This suggests that the temporary inflation acceleration should not have a significant impact on policy, and hence on EUR, for now. 

French politics and Fed policy will remain more important drivers for EUR/USD. In the medium term, an ongoing inflation recovery should support the EUR more clearly, barring political shocks. 

Our economists see the incoming growth and inflation data surprising the consensus on the upside, even though the ECB’s upward revisions to the near-term inflation outlook were larger than anticipated. This means pent-up demand for EUR could be greater after political events. 

Regarding the magnitude of EUR recovery, we will also closely monitor the possibility of a rate hike by the ECB before QE ends. President Draghi said he does not want to speculate on this, and our base case scenario is that rate hikes will come after QE ends. 

Nonetheless, an earlier hike could potentially accelerate EUR appreciation after the elections, as EUR tends to react to the shorter end of the curve."