In addition to presenting the voting results on interest rates, the central bank usually issues a statement at the end of the meeting. This statement is not the same as European Central Bank President Christine Lagarde's speech. The statement typically reflects the views of the members of the Governing Council on the current state of the economy, key economic indicators, prospects, forecasts, and more. Let's take a look at what the ECB had to say this time.
As I mentioned earlier, all three key interest rates remained unchanged, and the market was not expecting any changes in rates. The central bank confirmed that medium-term inflation risks persist, and inflation will fall in 2024 much more slowly than in 2023. The statement mentioned that the trend of weakening core inflation continues, and the rate hike to 4.5% continues to impact financial conditions.
Tight financing conditions are dampening demand, slowing wage growth, and business activity. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner, and keeping rates at their current levels for an extended period will make a substantial contribution to this goal. The central bank's statement also mentioned its intention to ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
The Governing Council believes that they need to maintain pressure on economic activity in order to be more confident of lower inflation. The statement also confirmed that the Governing Council's interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data.
In addition, the ECB's final statement mentioned that the balance sheet would continue to shrink at a moderate pace. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. It is worth noting that this is also a restrictive measure, just like raising interest rates. Therefore, the ECB has all the tools to combat inflation and continues to use them to achieve price stability.
I should note that there was no mention of future rate cuts in the final statement. As of now, demand for the single currency is moderately decreasing, but the market could also increase demand for the US dollar in light of the strong US GDP report for the fourth quarter. Either way, I fully support the euro's decline, as I believe that most of the factors currently support the US currency.
Based on the analysis, I conclude that a bearish wave pattern is being formed. Wave 2 or b appears to be complete, so in the near future, I expect an impulsive descending wave 3 or c to form with a significant decline in the instrument. The failed attempt to break through the 1.1125 level, which corresponds to the 23.6% Fibonacci retracement, suggests that the market is prepared to sell a month ago. I will only consider short positions with targets near the level of 1.0462, which corresponds to 127.2% Fibonacci.
The wave pattern for the GBP/USD pair suggests a decline. At this time, I am considering selling the instrument with targets below the 1.2039 mark because wave 2 or b will eventually end, and could do so at any moment. However, since we are currently observing a flat pattern, I wouldn't rush to short positions at this time. Since the movement has been horizontal for a month now, I would wait for a successful attempt to break below the 1.2627 level in order to have more confidence in the instrument's decline.