The euro declined 1% against the USD following the European Central Bank meeting on 7 March as the ECB downgraded its economic forecasts and introduced fresh stimulus measures. This year’s Eurozone growth forecast was cut from 1.7% to 1.1% and the inflation forecast from 1.6% to 1.2%. The ECB adjusted its interest rate guidance and announced a new bank funding facility.

But the changes are not as dramatic as the press headlines might suggest:

* The macro forecast changes were unsurprising and merely align the ECB’s estimates more or less with market expectations. The forecasts remain far from indicating either recession or deflation.

* The revised growth outlook necessitated only slight tweaks to monetary policy. Forward guidance for the first interest rate hike was pushed back for only another three months, until the end of the year. We don’t expect the first hike until spring 2020. The ECB also announced a third Targeted Long-Term Refinancing Operation (TLTRO III), partly aimed at helping banks roll over the EUR 720bn of existing maturing TLTRO loans. This was expected and the only, minor surprise was that the TLTROs were announced this month rather than at a later meeting.

* ECB President Mario Draghi did not present a plan B and said that the possibility of rate cuts or renewed asset purchases was not discussed.We advise against fighting this latest euro fall under the current circumstances. But we expect this trend to reverse somewhere above EURUSD 1.10 and do not expect 1.10 to be broken. Further out, we are bullish on the euro, both if the Eurozone economy starts to recover from its current weakness and if the risk case of a more serious downturn materializes, because in the latter case the US Federal Reserve has scope to cut rates and the ECB has limited ammunition to ease further. We forecast EURUSD at 1.15 over six months and 1.20 over 12 months.