ECB maintains course amid mixed economic signals

[Ben Graham]

While the euro is trying to gather strength for a new upward move against the US dollar, Chief Economist Philip Lane believes that the European Central Bank (ECB) will be able to keep inflation at the target level due to falling prices for non-energy goods.

The Irish official remarked at an event in Paris that in order to maintain inflation at 2%, further slowing of non-energy inflation is necessary. He expressed confidence that this would happen, as all observed indicators suggest a continued slowdown in wage growth.

Many economists expect that the ECB will keep borrowing rates unchanged for the fourth consecutive meeting. Most officials are assured that inflation will not deviate sharply from the target level in the near future.

Earlier that same day, Vice President Luis de Guindos stated that the risk of not achieving the target level is limited.

On the one hand, overall inflation is indeed showing signs of slowing down, aided by decreasing energy prices. On the other hand, core inflation, which excludes volatile components such as energy and food prices, remains resilient. This indicates that inflationary pressure is spreading across a broader range of goods and services, complicating the ECB's task of returning to the target level.

Many economists express concerns that reliance on a slowdown in wage growth may not be sufficient to keep inflation in check. Additionally, geopolitical instability and new supply chain disruptions could provoke another surge in energy prices at any moment, undermining the ECB's efforts.

On the plus side, the eurozone economy is growing, and the unemployment rate remains at a record low, which is quite positive. However, wage growth is also slowing, allowing the ECB to maintain a wait-and-see stance regarding interest rates. Lane stated that the overall tendency to keep inflation near the target level continues to be the result of various interacting factors.

While price increases in the services sector exceed 3%, this is partly explained by wage growth still lagging behind the post-pandemic surge in inflation. ECB analysts anticipate a significant slowdown in growth rates going forward. For inflation to be at 2%, we need wages in Europe to grow by around 2.5% or 3%.

The euro reacted moderately to this ECB representative's statement.

Regarding the current technical outlook for EUR/USD, buyers now need to focus on reclaiming the 1.1590 level. Only by doing so can they aim for a test at 1.1615. From there, the price could potentially rise to 1.1635, but doing this without support from major players will be quite challenging. The furthest target is the high around 1.1655. If the pair declines, significant activity from buyers is anticipated around the 1.1570 level. If no buyers are present there, it would be prudent to wait for a new low at 1.1550 or to open long positions from 1.1530.

As for the current technical outlook for GBP/USD, pound buyers need to break through the nearest resistance at 1.3250. This will allow them to target 1.3280, above which further movement will be quite challenging. The furthest target is around 1.3310. If the pair declines, bears will likely attempt to take control at the 1.3210 level. If successful, a break below this range would deliver a significant blow to bull positions, pushing GBP/USD down to a minimum of 1.3185, with the potential to reach 1.3155.

The material has been provided by InstaForex Company - www.instaforex.com