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The ECB's outlook for higher inflation is threatened by a renewed trend higher in the effective EUR, which, when considering the 3M change, is at the highest rate in more than two years.
The upward pressure on the EUR has strengthened after People's Bank of China has joined the global currency war and together with an expected later lift-off from the Fed, there is pressure on the ECB to express a dovish stance with the aim of weakening the exchange rate. The ECB's new inflation projection will not include the latest strengthening of the EUR in the second half of August and overall the exchange rates will not change the updated forecast for inflation significantly, says Danske Bank.
