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According to economists at Westpac, the European Central Bank (ECB) will look through higher CPI due to regional double dip recession while Italian risks are set to dissipate under a Draghi led Government. EUR/USD should find stability around 1.20.

Key quotes

“This week’s surprise lift in January CPI (Headline rose to +0.9% YoY and core to +1.4% YoY) is not going to provide much solace to ECB. The lifts were largely due to the ending of covid-related, temporary sales tax reductions, interim supply constraints and German emissions charges. There are also other base effects that will be looked through and so the ECB’s vocal concern in its latest meeting about the long-term lack of any material inflationary pressure is unlikely to be altered. More pressing is that Q4 GDP data and the current lockdown are virtually ensuring that the region will face a double dip recession to begin 2021.” 

“A potential pitfall in the Eurozone’s recovery appears to have been averted by the likely appointment of former ECB President Draghi as Italian PM to head a technocrat caretaker Govt. in a similar vein to Monti’s 2011 appointment. His gravitas and experience is likely to provide a sound Recovery Fund allocation and firm Italian relations with the EU and ECB.”

“ECB is likely to be more comfortable with EUR/USD trading close to 1.20 and this may also be mentioned at the mid-February Eurogroup and EcoFin summits.”