11.02.202613:41 Forex Analysis & Reviews: When to expect new wave of inflation in euro area

While the euro has been rapidly strengthening against the US dollar, producing powerful disinflationary effects, the European Central Bank forecasts that wage growth in the euro area will accelerate only in the second half of the year, supporting the view that interest rates may remain unchanged for a prolonged period in 2026.

The ECB's wage report projects pay growth of 2.7% year-on-year in the fourth quarter after 2.6% in the third. Although this is well below the peak of over 5% seen in 2024, it is stronger than the previous forecast for the first half of the year. The ECB said the pickup in annual wage growth is related to the fading mechanical drag from large one-off payments made in 2024 but not in 2025. These mechanical effects are expected to dissipate during 2026.

In this context, the ECB's projection of faster wage growth in the second half of the year takes on particular importance. Wage acceleration is viewed as one of the potential drivers of inflation that could prompt a reassessment of policy later on. However, if pay growth does not pick up until the second half, the central bank has room to maintain its current hands-off stance.

Officials' confidence that inflation will stabilize at 2% depends in part on slower wage growth, which would ease price pressures in the labor-intensive services sector. President Christine Lagarde recently said she is watching wage trends closely amid persistent uncertainty.

The ECB, which left interest rates unchanged last week, regards wages as a possible inflationary trigger because of their impact on services prices. At the same time, the recent appreciation of the euro could exert a strong disinflationary influence, offsetting concerns about rising service-sector price pressure.

The euro did not react to the report.

A technical outlook for EUR/USD suggests that buyers should consider reclaiming 1.1925. That would open the way to test 1.1957. From there, a move to 1.1994 is possible, although advancing beyond that without support from major players would be difficult. The extended target is 1.2037. On a decline, meaningful buying interest is likely near 1.1890. If buyers do not appear there, it would be prudent to wait for a new low at 1.1858 or to open long positions from 1.1832.

As for GBP/USD, buyers need to capture the nearest resistance at 1.3698. Only that will allow them to target 1.3730, above which a breakout would be challenging. The extended target is around 1.3757. If the pair falls, bears will try to seize control at 1.3660. If they succeed, a break of that range would deal a serious blow to bullish positions and could push GBP/USD down to 1.3625 with scope to extend to 1.3585.