19.12.202318:40 Forex-elemzések és áttekintések: The ECB warns markets against excessive expectations for a rate cut

This week, we've received insights from various members of the ECB Governing Council. Francois de Galhau, the President of the French Central Bank, was the first to communicate his views. He indicated that the regulatory authority has no intentions of raising the interest rate. In the French context, he observed that a recession has been avoided, despite once again revising down economic growth predictions. According to him, inflation will persist in its deceleration, with economic growth expected to rebound in 2025-2026. De Galhau foresees inflation returning to 2% by the end of 2025.

De Galhau also highlighted that unemployment in France is projected to continue its upward trend due to the "restrictive" interest rate, which will endure for some time. The ECB will commence rate reductions next year, but the process won't be immediate; a certain "transitional period" is deemed necessary for inflation to stabilize.

Bostjan Vasle, De Galhau's counterpart and the President of the Central Bank of Slovenia, sounded a note of caution regarding market expectations possibly diverging from reality. He noted that the markets anticipate an excessively significant rate cut next year and expect the regulator to initiate easing in the first or second quarters. However, the ECB will only reassess its stance on monetary policy when inflation reaches 2%, likely in the first half of 2024. Consequently, the ECB's inclination toward easing may only come to fruition in the summer, with the first rate cut expected in the third quarter.

Should de Galhau and Vasle's predictions hold true, the ECB's rate cut will commence in the fall of 2024. Recall that inflation in the EU is currently 2.4%, and inflation in the USA is 3.1%. Following this prediction of the timing of the rate cut, it turns out that the Fed will start lowering its rate even later. Powell stated that the rate could be lowered several times. Three times is also considered "several." Accordingly, Powell's words will be true if the FOMC starts lowering only in the second half. In winter, inflation may pick up slightly, so regulators will need more time to launch the process of easing monetary policy.

The main conclusion is that there should be no expectations of a change in policy at the upcoming meetings, neither in the European Union nor the United States. However, the market operates based on its forecasts and expectations, which may significantly complicate the current wave pattern.

Based on the analysis conducted, the construction of a bearish wave set continues. The targets around the 1.0463 level have been perfectly worked out, and the unsuccessful attempt to break through this level indicated a transition to the construction of a corrective wave. Wave 2 or b has taken on a completed form, so I expect the construction of an impulsive downward Wave 3 or c shortly, with a significant decline in the pair. I still recommend selling with targets below the low of Wave 1 or a. Stop-loss orders can be placed above the peak of the presumed Wave 2 or b.

The wave pattern of the pound/dollar pair suggests a decrease within the descending Wave 3 or c. I recommend selling the pair with targets below the 1.2039 level because Wave 2 or b is expected to complete eventually and may end anytime. The longer it extends, the stronger the subsequent pound decline will be. The peak of the presumed Wave e in 2 or b can be used for selling, and the order limiting possible losses from transactions can be placed above it.