Unchanged effective euro will be a headwind to inflation

The latest appreciation of the euro is a headwind to inflation and Draghi is likely to attempt to talk the euro down at the meeting in October by mentioning the divergence in monetary policy in the euro area and the US.

In December, when the ECB releases new inflation projections, it will have to take into account the fact that the euro has strengthened, implying the outlook for inflation should weaken.

The ECB's macroeconomic projections are based on the technical assumption that bilateral exchange rates are unchanged over the projected horizon. Given the current level of the effective euro, this implies it will turn into a headwind to inflation in 2016.

"The ECB also makes technical assumptions about the oil price based on the path implied by futures markets. Currently, the oil price has a slightly larger drag on inflation than in the September projection. But regarding the low oil price, the main risk is of second round effects. In case of this, the ECB will, in our view, ease again but so far it seems to be too early for it to be able to judge these effects", says Danske Bank.