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ECB announces to reduce monthly net asset purchases to EUR 15 billion after September

The European Central Bank surprised the market today. Firstly, the central bank stated that monthly net asset purchases would be lowered from EUR 30 billion to EUR 15 billion after September and then stopped at the end of 2018. Even if that was consistent with expectations, most analysts thought that it might defer some of the details of the ‘taper’ until the July meeting. The central bank’s guidance on the reinvestment of maturing assets was unchanged, however, as anticipated, stated Lloyds Bank in a research report.

Secondly, the central bank stated that its forward guidance on interest rates was altered and made more explicit. Previously, the ECB stated that interest rates are likely to stay at present levels “for an extended period of time and well past the horizon of the net asset purchases”. This was altered to interest rates are likely to stay at present levels “at least through the summer of 2019 and in any case for as long as necessary” to guarantee the inflation target is met. If taken at face value, it implies that interest rates would not be hiked before President Draghi’s last meeting in October 2019, although there was no discussion on when to raise rates.

The European Central Bank downwardly revised its economic growth forecast for this year to 2.1 percent to 2.1 percent from 2.4 percent, but left unchanged the forecasts at 1.9 percent and 1.7 percent in 2019 and 2020, respectively. Daghi noted that the weak patch in the first quarter growth might continue into the second quarter and that economic uncertainty relating to geopolitical risks, including trade protectionism, had increased. However, the underlying strength of the economy was unchanged.

The central bank revised up its inflation forecast for this year and next year. It expects inflation to come in at 1.4 percent for both years, but upgraded both to 1.7 percent, while it left its projection for 2020 unchanged, also at 1.7 percent.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Euro was highly bearish at -159.354, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 116.787. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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