Don't Expect Much from European Central Bank Officials

[Ben Graham]

The European Central Bank (ECB) officials have taken a wait-and-see approach and are eagerly anticipating the next release of their economic forecasts. It is quite possible that these new forecasts will help determine whether interest rates are sufficiently low to ensure a stable 2% inflation rate.

Policymakers speaking on the sidelines of the European financial leaders' meeting in Copenhagen last week were confident that a deposit rate of 2% is currently appropriate to achieve this goal. However, opinions were divided over the severity of risks affecting the outlook for further inflation growth.

President Christine Lagarde stated that the ECB has achieved its goal of curbing price growth, but uncertainty about the outlook remains — despite a trade agreement with the U.S. Earlier in September, officials left rates unchanged and said that the current policy stance is adequate. This prompted economists and traders to scale back expectations of further rate cuts this year.

The projections behind that decision assumed a 1.9% inflation rate in 2027, slightly below the ECB's target. The next set of forecasts will be published in December and will, for the first time, include projections for growth and inflation in 2028.

Martins Kazaks from Latvia stated that it would be naive to believe that the ECB can continuously maintain a 2% inflation rate, and that it is unreasonable to adjust rates every time something goes wrong. "We don't need to rush, and as a central bank, we should not hurry at every meeting. We will change rates if needed, but for now, we have reached the 2% target," he said.

Yannis Stournaras, Governing Council member from Greece, also believes that despite the uncertainty, the EU's position is generally well-balanced — not perfect, but good. "The ECB is still data-dependent, but the bar for further easing is high. If we identify a change in circumstances during our monetary policy meetings, we will make adjustments," he noted.

Madis Muller, Governing Council member from Estonia, also said in his speech: "At the moment, given that interest rates are moderately supporting growth and inflation is at the desired level, I don't think we need to do anything further. Going forward, growth will be driven by domestic demand."

Overall, considering that all European policymakers are taking a nearly identical stance, there is no reason to expect any intervention in current monetary policy.

As for the current technical outlook for EUR/USD, buyers now need to focus on reclaiming the 1.1750 level. Only then will a test of 1.1785 become possible. From there, the pair may reach 1.1820, though doing so without support from major players would be quite difficult. The ultimate target would be the 1.1850 high. In the event of a decline in the instrument, I expect any serious buying activity only around the 1.1700 level. If there are no buyers at that point, it would be wise to wait for a retest of the 1.1664 low or consider opening long positions from 1.1635.

As for the current technical outlook for GBP/USD, pound buyers need to break above the nearest resistance at 1.3505. Only then can they target the 1.3555 level, above which a breakout will be quite difficult. The final target would be the 1.3605 level. Should the pair fall, bears will attempt to take control of the 1.3455 level. If they manage to do so, a breakout of that range could deal a serious blow to the bulls and push GBPUSD down to the 1.3415 low, with a further prospect of reaching 1.3380.

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