The euro continues to slide against the US dollar as odds are high that the European Central Bank might leave interest rates unchanged for the first time in over a year. With increasing evidence suggesting that the unprecedented rate hikes have been instrumental in curbing inflation but simultaneously taking a toll on the Eurozone's economy, it seems plausible that now might be an opportune moment for a pause.
According to several leading analytical firms, after ten consecutive rate increases, today policymakers might keep the deposit rate at 4%, and the key refinancing rate at around 4.5%, potentially leading to a further dip in the euro against the US dollar.
It is indisputable that the euro area has been grappling with a recession in recent months – especially given recent data on manufacturing and services sector activity across member countries. More expensive credit is putting strain not only on households but also on businesses.
ECB officials have recently signaled that borrowing costs will remain elevated for a prolonged period to bring inflation back to the target level of 2%. However, no mention has been made of any imminent rate hikes. Undoubtedly, some policymakers are pushing for tighter monetary policy, especially if tensions in the Middle East threaten to boost energy prices.
Yet, beyond interest rates, one should not overlook the pressing issue related to the ECB's €1.7 trillion bond portfolio, accumulated during the pandemic to stimulate the economy. Some officials are advocating to halt the reinvestment of these securities earlier than planned. While such a move might trigger market turbulence, the matter remains far from settled.
Following today's interest rate decision, President Christine Lagarde is set to speak at a press conference, shedding light on the bank's future policy. This could have a severe impact on the exchange rate of the European currency against the US dollar. Firm statements by Lagarde and plans to maintain rates at current highs for an extended period might help the euro recoup some of its early losses. However, if her stance is less assertive and she takes a wait-and-see approach, the euro will come back under pressure.
From a technical point of view, euro buyers need to stay firm above 1.0530 to reclaim market control, which would pave the way back to 1.0560. A further rise to the 1.0590 mark is possible but requires support from major players. The ultimate target lies at the high of 1.0620. In a bear case scenario, major buyers are likely to take action only at around 1.0530. As an alternative, it would be a wise decision to wait for the price to fall below the low of 1.0490 or go short at the 1.0470 mark.
As for the GBP/USD pair, demand for the British currency will only return if bulls can protect the immediate support at 1.2070. Further gains are possible after regaining control over the 1.2100 mark. If the price consolidates above this level, the pound sterling will have a chance of climbing to 1.2140 and then probably 1.2170. In a bear case scenario, bears will attempt to drag the price down to 1.2070. Its successful breakout will bring sterling down to the low of 1.2040 and even 1.2010.