The euro dipped upon receiving news that the European Central Bank has concluded its streak of interest rate hikes in spite of looming inflationary risks. These risks stem from surging oil market asset prices and the ongoing conflict between Israel and HAMAS.
It was revealed that the benchmark rate remains fixed at 4.5% after a series of 10 consecutive hikes, initiated in July 2022. The deposit rate also stands pat at 4.0%. The Governing Council underscored that recent price growth data affirms their medium-term inflation forecast of 2.1%. The statement elaborated, "Inflation is expected to persist at elevated levels for a prolonged period, accompanied by internal price pressures. However, there was a notable decline in inflation in September, partly attributed to a slowdown in core metrics."
This kind of decision was projected with a 98% likelihood, hence no significant volatility surge ensued. Investors interpreted today's move as dovish, given that the ECB stated that rates have reached a point contributing significantly to inflation combat. However, the Governing Council's future decisions remain data-dependent.
ECB officials reinforced their stance that rates are likely to remain at these levels for a considerably longer duration than previously anticipated. Simultaneously, they emphasized that an inflationary jolt might propel them to a new rate increase. Such statements were crafted to temper market expectations of an imminent rate drop.
Clearly, the oil price shock could nudge the ECB towards another hike. This necessitates the central bank to maintain a sufficiently stringent monetary policy. This is to align with their current inflation forecasts: 5.6% for this year, 3.2% for the next, and 2.1% in the medium term.
A crucial factor in today's decision against a rate hike was the persistently weak business activity, with data released earlier this week, coupled with modest growth forecasts pegged at 0.7% for 2023 and 1% for 2024.
It is anticipated that during today's address, ECB President Christine Lagarde will emphasize the need for central banks and the market to brace for a prolonged period of high interest rates. This implicitly leaves the door ajar for potential rate increases in the future.
To regain control, buyers should ensure the pair remains above 1.0530, which would set the stage for a move towards 1.0560. A further push towards 1.0590 is possible from there, but achieving this without significant backing from key market players could be challenging. The ultimate target appears to be the 1.0620 peak. On the flip side, any downturn could see serious buying actions around the 1.0530 mark. In the absence of substantial buyers, it would be prudent to await a refresh of the 1.0490 low, or consider initiating long positions from 1.0470.
Demand for the pair will likely be rekindled once the proximate support at 1.2070 is defended. Any further strengthening of GBP/USD would predominantly hinge on securing control above the 1.2100 level. Establishing this range would rejuvenate hopes for a recovery towards 1.2140, after which discussions might turn towards a more aggressive upward thrust of the pound to 1.2170. Should the pair face a decline, bears will vie for control over the 1.2070 level. If they succeed, breaching this range would jeopardize bullish stances and possibly send GBP/USD plummeting to a minimum of 1.2040, with sights set on the 1.2010 level thereafter.