FX.co ★ ECB policy meeting in September full of puzzles

Some European policymakers recently expressed optimism about the future of inflation in the Eurozone. Nevertheless, the euro is still extending its weakness due to a high likelihood that the Federal Reserve will maintain its hawkish monetary policy for longer. The European Central Bank's chief economist, Philip Lane, cautiously expressed an optimistic view on inflation yesterday, stating that the slowdown in price growth for goods and services is welcome and that the primary pressure will continue to ease. In an interview, the policymaker labeled 2023 as the "peak of the second round" as the effects of previous hikes continue to impact the economy. "Overall inflation is at 5.3%, which is a high level," Lane said. "In terms of looking for momentum signals and directional change signals, I would emphasize the fact that there has been some easing in core inflation, which is a long-awaited event."

Lane did not specify what he would vote for at the upcoming ECB policy meeting on September 14th when officials will discuss either another hike or a pause in the tightening cycle. President Christine Lagarde, speaking also yesterday, refrained from stating her views on the matter.

Importantly, the ECB's chief economist, recently leaning towards a dovish agenda, also hinted at some hope that the task of curbing consumer price growth isn't as challenging as before. He also emphasized that core inflation, which excludes several highly volatile price categories, shows good progress.

Lane spoke after the publication of the eurozone's consumer price report for August, which was the last one the ECB referred to before deciding on interest rates. The report showed that inflation stuck above 5% in both headline and core measures.

ECB policymakers want to "timely" bring consumer price growth to 2%. "People are quickly realizing that the current inflation episode is time-limited, so they should not change their long-term behavior, implying that inflation will remain high," Lane said. "We want people to understand that this is a temporary episode in history."

Most likely, many more officials will make their comments by Wednesday, after which a "silence regime" will ensue. So, policymakers must refrain from any remarks until the central bank's meeting.

Regarding the technical picture of EUR/USD today, the bulls have slightly loosened their grip. For buyers to retain control, they need to stay above 1.08770, which will be quite a challenge. Only this gives them a chance to break back to 1.0805. From that level, it's possible to climb to 1.0840, but achieving that without support from major players will be quite problematic. If the instrument declines, I anticipate any significant actions from major buyers only around the 1.0770 level. If no one is present there, it would be advisable to wait until the 1.0735 low is updated or to open long positions from 1.0705.

As for the technical picture of GBP/USD, the pair is again coming under selling pressure after a correction. We can only count on strengthening after the bulls gain control over the 1.2635 level. Retaking this range will revive hopes of a recovery towards 1.2670, after which we can talk about a more abrupt surge of GBP/USD up to the 1.2710 area. In case of the pair's decline, the bears will attempt to take control of 1.2600. If they manage to do so, breaking this range will strike the bulls' positions and push GBP/USD to a low of 1.2570 with the prospect of dropping to 1.2545.