Core inflation – New pillar of Dovish ECB

ECB meeting confirms our long-held view that the central bank’s policies are likely to remain very accommodative, despite the broadening of the economic recovery and a rise in headline inflation in the common currency area. The focus on core inflation remains key for Draghi as he justifies extraordinary central bank policy support in the face of the positive data surprises of recent months.

Monetary policy remains the key source of support for the currency union and we think the ECB will continue to be cautious when it comes to adjusting its stance, especially at a time of heightened political risks. We continue to see yields range-bound in the Eurozone, with politics and US dynamics remaining the key drive of dynamics, while we expect the euro to remain somewhat supported as French political uncertainty diminishes – assuming that we see the Macron victory that is currently predicted in opinion polls. Nonetheless, we see upside for the euro capped at around 2% from pre-French election levels.

Salman Ahmed, Chief Investment Strategist, Lombard Odier Investment Managers

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