The European Central Bank will increase interest rates by 0.5 percent once more today, but investors will be more focused on any indications of how the cost of borrowing will change following this week's meeting.
The Federal Reserve System's decision to slow down the rate of interest rate hikes yesterday had a beneficial effect on the positions of the European currencies. If investors do not learn about the ECB's more aggressive strategy in the spring of this year, the bull market could easily change today.
Without a new supply of the euro, it will be challenging to maintain current highs, as the second consecutive increase in interest rates by 50 basis points has already been factored into current prices. The pricing figures from Tuesday may change the officials' minds, despite their frequent warnings about high inflation during January and their insistence on continuing the previous pace of rate increases.
Since, as I mentioned above, inflation is declining, but at the same time other indicators suggest that additional actions from the ECB may be necessary to suppress the strongest price jump in the eurozone in the last generation, the issue of whether there will be a third 0.5% increase in March or the ECB will still follow the Federal Reserve System is currently the subject of intense debate. The president of the European Central Bank will undoubtedly argue at today's meeting that core inflation is still high.
In Frankfurt, the ECB will deliver its announcement at 14:15. President Christine Lagarde will speak right away, half an hour after pledging that she and her colleagues will "keep the course" in the fight against inflation.
Joachim Nagel, the president of the Bundesbank, and Francois Villeroy de Galhau, the representative of France, have already endorsed two additional measures to raise the rate by half a percentage point beginning with today's meeting. In other words, there is still at least one more meeting in March where the hawks can also get a 0.5% rate increase.
The emphasis is now on the language of the ECB statement and Lagarde's statements, which will be studied for signals as other council members argue for a more gradual approach.
By May of this year, the ECB deposit rate is anticipated to reach a peak of 3.25%. A further 50 basis point increase is anticipated by economists for next month, followed by a pause in aggressive policy in May.
The economic outlook has improved, but it is still uncertain because demand is still declining as a result of the increasing cost of living. Households are probably not significantly impacted by a large decline in natural gas costs at the wholesale level. This won't result in immediate economic growth; it will only help the ECB get inflation back to normal more quickly.
Regarding the ECB's effort to reduce its balance sheet, the regulator decided in December to gradually begin selling off its about 5 trillion euro worth of bonds. The total balance is anticipated to decline by 15 billion euros per month from March through the end of June, and the future rates will be adjusted as appropriate.
Regarding the EUR/USD technical picture, the demand for the euro has grown and might continue. To do this, the trading instrument must maintain a price above 1.1000, which will cause it to break through near 1.1050. Above this point, you can quickly reach 1.1090 and have the potential to update to 1.1125. Only if the 1.1000 support fails will the pressure on the pair rise, pushing the EUR/USD to 1.0960 with a possible drop to a minimum of 1.0920 in the case of a decline in the trading instrument.
Regarding the technical picture of the GBP/USD, trading continues within the channel. Buyers need to return over 1.2420 to restore their advantage. The only way to increase the likelihood of a further recovery to the area of 1.2470 and, ultimately, a stronger movement of the pound up to the area of 1.2540, is for this resistance to break. After the bears seize control of 1.2350, it is feasible to discuss the pressure on the trading instrument. The GBP/USD will be forced back to 1.2290 and 1.2230 as a result, hitting the bulls' positions.
