According to the European Central Bank (ECB), core inflation in the eurozone may have peaked. However, its exact level remains hard to determine. The recent report by the regulator showed that a decline was mainly caused by lower prices of non-energy industrial goods. A noticeable decrease was also recorded in the services sector. The ECB believes that internal price pressure is weakening, echoing conclusions made by the Governing Council two weeks prior.
Notably, at the meeting, policymakers raised interest rates for the ninth time to 3.75%. They stated that inflation would remain too high for a long time. President Christine Lagarde promised a deeper analysis of the main trends in September. This will help decide whether to raise rates again or pause. "Underlying inflation measures should capture more persistent and generalized developments across prices, abstracting from volatile or idiosyncratic relative price movements, and thereby provide an informative signal about where headline inflation will settle in the medium term," the ECB wrote.
The report also said that any future policy decisions depend on incoming economic and financial data. Notably, policymakers have repeatedly highlighted the delayed economic response to the central bank's monetary policy changes. A careful analysis of the incoming data is currently the best approach. The ECB council members need to see a sustained decrease in inflation, not just temporary fluctuations due to the energy sector, where prices have recently stabilized and returned to normal.
Fabio Panetta, a member of the ECB's Executive Board, stated that while core inflationary pressure is declining, "empirical evidence suggests so-called core price growth is a lagging – not a leading – indicator." "Core inflation today does not tell us much about where headline inflation will settle in the medium term," the politician said. "Just as higher energy prices seeped through the economy on the way up, they will also eventually do so on the way down," he added.
However, the ECB's chief economist, Philip Lane, is confident that inflation in the eurozone will decrease significantly in the coming months. This suggests that interest rates are close to their peak. "While price pressures won't hit the ECB's goal until sometime in 2025, the recent decline in energy will reduce costs across the economy," the ECB representative noted. According to forecasts, inflation should drop significantly by the end of this year, but if the ECB aims for its target of 2%, it could be reached only by 2025.
Regarding today's technical picture for EUR/USD, pressure on the euro remains the same. To regain control, buyers should keep the price above 1.0970. This would pave the way to 1.1005. From there, the price may climb to 1.1040. However, it would be quite difficult without support from major traders. If the pair drops, I expect significant action from major buyers only around 1.0970. If they fail to be active, it would be wise to wait for a low of 1.0915 or consider long positions from 1.0870.
Meanwhile, the pound sterling also remains under pressure. The pound sterling will rise only after bulls gain control over the 1.2790 level, which still needs to be reached. Regaining this range will boost hopes for a recovery to 1.2840, after which we can talk about a surge to around 1.2880. If the pair falls, bears will attempt to take control over 1.2740. If they succeed, a breakout of this range will hurt bulls' positions and push GBP/USD to a low of 1.2690, with the potential to drop further to 1.2650.