FX.co ★ EUR/USD: ECB released positive forecasts for the EU economy, but other banks believe the opposite.

Demand for the euro began to decline yesterday, after the speech of ECB President Christine Lagarde, even though it was more about the EU banking system and profit forecasts. Lagarde also said that despite the spread of the coronavirus and the resumption of quarantine, the European Central Bank's expectations for economic growth in the eurozone remain very positive.

In fact, according to Lagarde, many of the uncertainties that previously darkened the economic outlook have now cleared up. In particular, these are the US elections, Brexit trade deal and vaccinations in the EU. At the same time, the ECB president said the monetary policy and the support that it provides to the entire system will continue at the same levels.

Therefore, the Central Bank forecasts the EU economy to grow by 3.9% this 2021, especially if the government finally lifts the ongoing lockdowns. According to Lagarde, the start of this year will be more positive than previously thought.

But other banks, on the contrary, have downgraded their forecasts, which made many investors nervous. In a recent report, JPMorgan said they project the EU economy to drop by 1% in the first quarter, while UBS said they expect the economy to fall by 0.4%. Goldman Sachs also stated that they predict a small reduction with great uncertainty and risks.

In any case, the ECB will meet again next week, and during which they will discuss the future of the monetary policy. Today though, the bank will release a report regarding the extension of the emergency bond purchase program, which traders will closely monitor.

Actually, Lagarde already mentioned this issue yesterday, where she said that if the new aid package is too large, then it is not necessary to use it in full. But if it is insufficient, she said the bond purchase program could again be increased, which led to a decline in the European currency.

Lagarde also mentioned that the ECB will closely monitor the growth of the euro against the dollar, as such will put pressure on inflation since it would reduce import costs.

Regarding inflation, the German Central Bank released its forecast yesterday, which is a rise of about 3.1% over the next 12 months. However, this is only the average forecast of the economists surveyed. All in all, the Bundesbank predicts that inflation in Germany will rise to 1.8% this year, from -0.7% at the end of 2020. The main driver of growth will be the increase in gasoline prices, after the introduction of the emissions tax, as well as the expiration of the temporary VAT reduction, which the government resorted to last summer.

As for the United States, official reports said its CPI rose by 0.4% in December, after climbing by 0.2% in November. According to the US Department of Labor, the main increase was caused by the 8.4% jump in gasoline prices, as well as the 0.4% rise in food prices.

Its underlying index, which does not take into account volatile categories, also grew by 0.1%. As for the annual growth rate of consumer prices, it remained at 1.6%.

This slowdown in core inflation suggests that the Fed is unlikely to resort to the highly-anticipated change in the monetary policy. But if a new fiscal stimulus is adopted by the government, the US Central Bank may consider a change in order to prevent the overheating of the economy.

With regards to the EUR/USD pair, a bearish movement is expected to persist in the market. In particular, if the quote drops below 1.2180, the euro has a very high chance of collapsing to 1.2130, and then to 1.2080 and 1.2010. But if the upcoming US data turns out weaker than expected, EUR/USD could climb towards 1.2225.