For the European and British currencies, the answer to the question of what will happen next with inflation is very important. Although the ECB and the Bank of England consistently tighten monetary policy, inflation is either decreasing slowly or not. Analysts are gradually changing their expectations in favor of less aggressive and stringent measures, realizing that central banks cannot raise their rates to levels that would guarantee a drop in inflation to 2%.
Let me remind you that there is a rule for determining the rate size depending on the inflation target. According to this rule, the rate should be raised to 2–3% below the maximum inflation. In the European Union, it needs to be raised to 6–7%. In the UK, even higher. Of course, this rule is quite conditional, and the terms for returning inflation to the target level are not considered or blurred. Central banks take different positions regarding the terms of returning to 2%. The Fed is ready to raise the interest rate as much as needed, as it wants to see price stability close to 2% by the end of the year. The Bank of England is still only hoping for a drop in inflation to 3%, but there is almost no chance of that. The ECB takes the most neutral position, trying not to cool the economy down.
On Friday, ECB Vice President Luis de Guindos said that the regulator would evaluate the incoming information from meeting to meeting and make decisions on the rate directly at the meetings. Previously, the ECB stated how much it planned to raise the rate at the next meeting. De Guindos stated that he is confident in the decrease of core inflation, but its current value is too high to expect a quick decline. This statement is not the first from ECB members. Earlier, other governors used similar language. Therefore, there is a unanimous opinion on policy but no unanimous opinion on the rate. Or we do not know anything about it.
Let me remind you that the market expects three more rate hikes in the European Union by 25 basis points each. It is still being determined whether this will be enough demand for the euro to start growing again. The market has already had enough time to respond to this information, which is not secret. In the UK, after 11 rate hikes, the central bank is also unlikely to plan a significant rate increase in 2023. Based on this, demand for the British pound and the euro should decrease. The Fed also does not plan significant tightening, so demand for the US currency should stay the same too.
Based on the analysis, the formation of the upward trend segment has been completed. Therefore, selling is now advisable, as the pair has a large space for a decline. The target of 1.0600 can be considered quite realistic. With this goal in mind, I recommend selling the pair on MACD indicator reversals “downward” until the quotes successfully attempt to break the 1.1030 mark, which may not happen.
The wave pattern of the pound/dollar pair suggests the formation of a new downward wave. The wave labeling is currently ambiguous, as is the news background. I do not see long-term factors supporting the British pound, and wave b could be very deep. A decrease in the pair is more likely now since all the waves recently were approximately the same size. Trading can now be done from the 1.2440 level, corresponding to 0.0% Fibonacci. Below it – sell with targets 300–400 points lower; above it – cautiously buy.
The material has been provided by InstaForex Company – www.instaforex.com
For the European and British currencies, the answer to the question of what will happen next with inflation is very important. Although the ECB and the Bank of England consistently tighten monetary policy, inflation is either decreasing slowly or not. Analysts are gradually changing their expectations in favor of less aggressive and stringent measures, realizing that central banks cannot raise their rates to levels that would guarantee a drop in inflation to 2%.
Let me remind you that there is a rule for determining the rate size depending on the inflation target. According to this rule, the rate should be raised to 2–3% below the maximum inflation. In the European Union, it needs to be raised to 6–7%. In the UK, even higher. Of course, this rule is quite conditional, and the terms for returning inflation to the target level are not considered or blurred. Central banks take different positions regarding the terms of returning to 2%. The Fed is ready to raise the interest rate as much as needed, as it wants to see price stability close to 2% by the end of the year. The Bank of England is still only hoping for a drop in inflation to 3%, but there is almost no chance of that. The ECB takes the most neutral position, trying not to cool the economy down.
On Friday, ECB Vice President Luis de Guindos said that the regulator would evaluate the incoming information from meeting to meeting and make decisions on the rate directly at the meetings. Previously, the ECB stated how much it planned to raise the rate at the next meeting. De Guindos stated that he is confident in the decrease of core inflation, but its current value is too high to expect a quick decline. This statement is not the first from ECB members. Earlier, other governors used similar language. Therefore, there is a unanimous opinion on policy but no unanimous opinion on the rate. Or we do not know anything about it.
Let me remind you that the market expects three more rate hikes in the European Union by 25 basis points each. It is still being determined whether this will be enough demand for the euro to start growing again. The market has already had enough time to respond to this information, which is not secret. In the UK, after 11 rate hikes, the central bank is also unlikely to plan a significant rate increase in 2023. Based on this, demand for the British pound and the euro should decrease. The Fed also does not plan significant tightening, so demand for the US currency should stay the same too.
Based on the analysis, the formation of the upward trend segment has been completed. Therefore, selling is now advisable, as the pair has a large space for a decline. The target of 1.0600 can be considered quite realistic. With this goal in mind, I recommend selling the pair on MACD indicator reversals “downward” until the quotes successfully attempt to break the 1.1030 mark, which may not happen.
The wave pattern of the pound/dollar pair suggests the formation of a new downward wave. The wave labeling is currently ambiguous, as is the news background. I do not see long-term factors supporting the British pound, and wave b could be very deep. A decrease in the pair is more likely now since all the waves recently were approximately the same size. Trading can now be done from the 1.2440 level, corresponding to 0.0% Fibonacci. Below it – sell with targets 300–400 points lower; above it – cautiously buy.
The material has been provided by InstaForex Company – www.instaforex.com
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