FX.co ★ EUR/USD: Neutral interest rate in the eurozone may be below zero, UK Inflation Down

The neutral interest rate in the eurozone may be below zero while Inflation in the UK has declined. A report from ECB economists says that the fall in yields on US bonds puts pressure on the US dollar.

The decline in the US bonds yields, as well as the narrowing of the yield spread between the US and German government bonds, continue to put pressure on the US dollar and the EUR/USD pair is growing. If the yield on US government bonds continues to decline, the weakening of the US dollar may continue even further and the US Federal Reserve will signal a less strong tendency to tighten policies after today's increase in the key interest rate.

Next year, the Fed is expected to raise interest rates only twice while in the decline, the forecast came down to at least three increases. The recent fundamental evidence points to the fact that the Central Bank should not rush to raise interest rates in the short term.

Eurozone

An interesting report from economists at the European Central Bank was published today, stating that the neutral interest rate in the eurozone may be below zero. Let me remind you that a neutral interest rate implies a state where there are no signs of both a slowdown in the economy and its additional stimulus to sustain growth.

The report says that the level of the neutral rate may drop even more.

This suggests that since all of the expected increase in interest rates in the euro area by the end of next year will be conducted at a very slow rate. Considering what fundamental data are now being received, it's not at all necessary to talk about more stable prospects for a change in monetary policy. Do not forget about the uncontrollable Brexit, which is approaching like a snowball, as well as about the tension in international trade.

As for the technical picture of the EUR/USD pair, it has not changed significantly compared with the morning forecast, as many traders are waiting for statements from the Federal Reserve System.

Bulls updated a large maximum near 1.1400 and are trying to gain a foothold above this level. However, only a delay in the increase of interest rates next year, together with a revision of a number of forecasts for the growth rate of the US economy, will strengthen the position of buyers of risky assets, which will lead to new highs of 1.1450 and 1.1490.

Great Britain

Meanwhile, the British pound is gradually declining against the US dollar. Apparently, the upward potential is gradually limited due to weak inflation data, which did not support the bullish sentiment observed at the beginning of this week.

According to the data of the National Bureau of Statistics of the United Kingdom, inflation slowed down in November of this year, which gives a "respite" to the Bank of England as its rate returned to the acceptable limits set at about 2 percent.

Most recently, the Central Bank announced that it will raise interest rates more than three times, if necessary, in the next few years. This will be done on the condition that prices continue to rise but also on the condition that the UK's exit from the EU will calmly pass and the parliament will approve the Brexit agreement.

According to the data, the annual rate of inflation in the UK was 2.3% in November against 2.4% in October. The main slowdown in price growth was due to lower energy prices. Compared to October of this year, the consumer price index rose by 0.2% in November, which fully coincided with the forecasts of economists.

As for the technical picture of the GBP/USD pair, as I noted above, its upward potential is exhausted and the breakdown of the support level of 1.2610 may lead to the formation of a larger downward movement, with the pound instantly returning to the lows of the month by the end of the week. But for this, you need to understand the support levels of 1.2560 and 1.2520.