Interest Rates Are at an Acceptable Level

[Ben Graham]

While the euro is gradually weakening against the U.S. dollar, European Central Bank Vice President Luis de Guindos stated that interest rates are at an acceptable level, although he warned of significant uncertainty due to geopolitical events.

De Guindos' statement comes amid growing concerns about economic growth in the eurozone. Inflation has nearly returned to the ECB's 2% target, which creates a dilemma for the regulator: the economy needs stimulus, but policymakers are hesitant due to geopolitical uncertainty.

The impact of geopolitical factors, which de Guindos highlighted, cannot be underestimated. Conflicts and tensions in various regions of the world, disruptions in energy and raw material supplies, and changes in trade policy all contribute significant uncertainty to the eurozone's economic outlook. Investors typically avoid risky assets during periods of instability, which can lead to capital outflows from the euro.

Speaking a few days after the arrest of Venezuelan President Nicolas Maduro in the U.S., de Guindos said: "Things are happening that would have been unthinkable just a few quarters ago." "In a complex geopolitical environment, investments in businesses can be affected."

According to de Guindos, despite improvements in real incomes, households are maintaining high savings levels because they have doubts about the future, including fiscal policy. Nevertheless, he noted that the complex geopolitical situation, including concerns about the ongoing conflict in Ukraine, has not had a significant impact on the eurozone economy.

"The current level of interest rates is adequate; the latest data fully match our forecasts," Guindos said. "Overall inflation is 2%, and inflation in the services sector, which concerns us, continues to slow."

"If circumstances change, our monetary policy will be adjusted," he added.

According to the latest data, inflation in December decreased to the ECB's 2% target, while underlying inflationary pressures also eased. Borrowing costs have remained unchanged since June, and investors and economists do not expect further cuts in the foreseeable future.

Technical Outlook for EUR/USD

Buyers need to focus on capturing the 1.1660 level. Only then will it be possible to target a test of 1.1681. From there, the next step could be 1.1705, although reaching it without support from major players will be challenging. The most distant target is 1.1725. In the event of a decline, only around 1.1641 would I expect significant action from major buyers. If there is no support there, it would be wise to wait for a retest of the 1.1619 minimum or open long positions from 1.1591.

Technical Outlook for GBP/USD

Pound buyers need to capture the nearest resistance at 1.3435. Only then will it be possible to target 1.3460, above which further gains will be difficult. The furthest target is 1.3488. In the event of a decline, bears will attempt to take control of 1.3403. If successful, breaking this range would seriously damage bullish positions and push GBP/USD down to the 1.3373 minimum, with the potential to reach 1.3341.

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