The euro is preparing for another test of strength in the face of the Federal Reserve System and its attitude to the future policy of interest rates. Moreover, according to two senior politicians, the European Central Bank will have to continue raising the cost of borrowing to combat record inflation despite all the difficulties that the economy is experiencing. "I am convinced that the recent rate increase by 0.75% is not the end. We still have a long way to go," Bundesbank President Joachim Nagel told the Frankfurter Allgemeine Zeitung. "Inflation is persistent, and it is becoming more difficult to fight. If we want to overcome it, monetary policy should be tighter."
His colleague, the Spanish politician De Cos, agreed, saying: "The ECB should bring interest rates to levels that will allow inflation to return to the medium-term goal of 2%, and we have not yet achieved this."
Let me remind you that last week the ECB raised the deposit rate to 1.5% and announced that it would increase the cost of borrowing again but would rely on incoming data. It is obvious that Europe is trying with all its might to control the rampant inflation growth, but as the latest data showed, it turned out badly. The price increase continued due to the development of one of the worst energy crises in the history of the EU. Recent reports have shown that consumer prices in the eurozone, including 19 members, reached a record 10.7% in October, exceeding analysts' estimates despite the weakening of economic growth.
This suggests that the economy's prospects are unclear, increasing uncertainty. No one knows how much more interest rates will have to be raised — this is a fact. De Cos also noted that the ECB's further policy would suppress high inflation, even though the eurozone economy has already reached a dangerous line when a recession may begin. The head of the Bundesbank, Nagel, a more hawkish politician, said, "the main task is to act decisively, as we have done in the last three meetings."
The differences between the two policies are also evident in long-term inflation expectations, which de Cos called "firmly anchored." At the same time, his German counterpart warned that there was a danger that they could deviate from the ECB's target.
As for the ECB's balance sheet, Nagel wants the so-called quantitative tightening to begin at the beginning of next year. Meanwhile, de Cos focused more on the pace of a potential reduction in the balance sheet, saying that although it needs to be done very quickly, at the same time, it is necessary to exercise some caution.
As for the technical picture of EURUSD, the bears actively counterattacked, which led to a new wave of decline. For growth, it is necessary to return the pair above 0.9900 and 0.9950, which will spur the trading instrument to grow between 1.0000 and 1.0040. However, the upward prospects will depend entirely on the further reaction of buyers of risky assets to the meeting of the Federal Reserve System. The parity breakthrough has taken place, allowing us to keep the market at the mercy of sellers. An exit below 0.9850 will increase pressure on the trading instrument and push the euro to a minimum of 0.9820, which will only worsen the situation of buyers of risky assets in the market. Having missed 0.9820, it will be possible to wait for the update of the lows in the area of 0.9780 and 0.9750.
As for the technical picture of GBPUSD, although the pound is being adjusted, it has already reached quite important levels. Now buyers are focused on protecting the 1.1500 support and breaking the 1.1550 resistance, limiting the upward potential of the pair. Only a breakthrough of 1.1550 will return the prospects for recovery to the area of 1.1610 and 1.1690, after which it will be possible to talk about a sharper jerk of the pound up to the area of 1.1730 and 1.1780. It is possible to talk about the return of pressure on the trading instrument after the bears take control of 1.1500. This will blow the bulls' positions and completely negate the short-term prospects of the bull market. A break of 1.1500 will push GBPUSD back to 1.1440 and 1.1345.
