"The ECB is likely to note that risks to its outlook are more balanced but also remain committed to significant monetary easing, which should keep the EUR under pressure, in our view.

The January meeting minutes noted that despite the ongoing pickup in headline inflation, members of the governing council acknowledged it was still premature to consider that a very substantial degree of monetary accommodation was no longer warranted. Much of this relates to the striking amount of excess capacity still present in the euro area economy and weighing on inflation, with most output gap estimates suggesting current output is about 2% below potential. While updated staff macroeconomic projections will likely incorporate an upside revision to 2017 inflation by at least 0.5pp (from 1.3% to 1.8%), projections for 2018 and 2019, which were 1.5% and 1.7% in the December scenario, should be unchanged. 2017

European political risk is another factor that should contribute to ECB caution and a weaker EUR. The 15 March Dutch election represents the first major European political event in 2017 and could contribute to rising fragmentation of European governments that impairs the ability of the European Council to respond decisively to EU political crises, as it did in 2011-12. This implies a weaker EUR over the coming year as the political risk premium grows and a strengthening in the historically low 12-month implied correlation between EURGBP and EURJPY".

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