ECB to keep rates unchanged for now

[Ben Graham]

The European Central Bank is likely to keep interest rates unchanged at least until the end of the year, according to a survey. Economists polled said the deposit rate will remain at 2% after the Governing Council meeting on February 4–5. The share of respondents expecting one or more rate hikes by 2028 rose from about one quarter in the previous survey to one third.

Those forecasts reflect rising economic uncertainty after US President Donald Trump indicated he could quickly abandon the trade deal struck with Europe last summer. At the same time, a stronger euro threatens to reduce exports and to weigh on inflation, which already lags the ECB's target.

For now, policymakers led by President Christine Lagarde say existing monetary settings are appropriate for the challenges ahead. Still, with the euro appreciating, Austria's president Martin Kocher and others have stressed the need to be ready to act quickly. At the meeting, Lagarde is likely to say the euro?area economy remains in decent shape but to warn that risks persist. Given renewed fragility in trans?Atlantic trade ties, the central bank may also address those issues.

Core inflation in the euro area remains above the ECB's 2% target, which argues for a cautious policy stance, but progress toward lower inflation has been reasonable. Economic growth in the region remains fragile, and geopolitical uncertainty from conflicts and the risk of new trade disputes adds to the risks.

Accordingly, the ECB is likely to adopt a wait?and?see approach, closely monitoring economic data and geopolitical developments before deciding on any further changes to rates.

Surveyed economists also said geopolitical tensions are at their highest level in at least two years after Mr. Trump used the World Economic Forum stage to demand Europe hand over Greenland or face higher tariffs. Although he ultimately backtracked, the episode has strengthened cooperation efforts across the continent. This week, Europe signed a trade agreement with India, following a separate deal with South American countries earlier this month.

The single currency has strengthened by roughly 15% over the past year and recently rose above $1.20 as overseas investors grew wary of the United States. Policymakers are watching but have not sounded the alarm.

ECB projections presented in the survey show the consumer price growth this year and next will be slightly below 2%, with the indicator returning to target by 2028. Economists see greater downside risks in the near term and higher upside risks in 2027, while medium?term inflation broadly matches forecasts.

Traders, however, have increased the odds of at least one rate cut this year. Only 12% of respondents expect one or more cuts by the end of 2027, but about 40% judge that a cut is more likely than a hike.

A technical outlook for EUR/USD suggests that buyers should consider reclaiming the 1.1950 level. That would open the way to test 1.1980. From there, a move to 1.2030 is possible, although advancing beyond that without support from major players would be difficult. The extended target is 1.2080. On a decline, I expect meaningful buying interest around 1.1890. If buyers do not appear there, it would be prudent to wait for a new low at 1.1850 or to open long positions from 1.1810.

As for the pound/dollar pair, buyers of the pound sterling need to capture the nearest resistance at 1.3780. Only that will allow them to target 1.3840, above which a breakout would be challenging. The extended target is around 1.3899. If the pair falls, bears will try to seize control at 1.3730. If they succeed, a break of that range would deal a serious blow to bullish positions and could push GBP/USD down to 1.3685 with scope to extend to 1.3630.

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