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The European currency has encountered some difficulties in its upward movement following yesterday's speech by the European Central Bank (ECB) President.
"The eurozone economy is facing exceptional shocks caused by challenges in trade, defense, and climate, which could increase inflation volatility and raise the risk of more persistent price growth," ECB President Christine Lagarde said on Wednesday.
These factors prevent the ECB from clearly signaling its policy intentions, making it even more crucial for the bank to commit to its 2% inflation target and outline how it will respond to various economic shocks.
Since June last year, the ECB has cut interest rates six times, but last week it refrained from giving any clear guidance on future policy, leaving markets uncertain about the onset of a period of heightened instability. This uncertainty is further fueled by the Trump administration's challenge to established international cooperation.
"Our expectations have indeed been overturned in recent years, especially in the last few weeks," Lagarde noted. "We have witnessed political decisions that would have been unimaginable just a few months ago."
The deterioration in trade relations is likely to lead to larger and more disruptive price changes. Additional spending on defense and infrastructure could also fuel inflation. However, Lagarde acknowledged the possibility that such shocks might counterbalance each other, neutralizing inflationary pressures.
The key issue for the ECB is that inflation reacts disproportionately to major shocks rather than smaller ones, potentially making it more persistent. ECB economists warn that this asymmetrical price response, combined with current wage-setting mechanisms, could create lasting inflation problems.
"If state-driven pricing becomes the norm, the regional economy will face serious shocks," Lagarde stated. "Major shocks will accelerate inflation growth, and wages will once again have to gradually catch up with prices."
Lagarde did not propose specific solutions but emphasized that the ECB must clearly define what it can and cannot do.
"While the ECB cannot promise to keep inflation at exactly 2% at all times, nor provide explicit policy direction, it must set policies that ensure inflation approaches the target over the medium term," she explained.
However, as I mentioned earlier, this speech had little immediate impact on the foreign exchange market, particularly the euro.
Currently, EUR/USD buyers need to break above the 1.0930 level to aim for a test of 1.0970. A further rise toward 1.1010 is possible but will be challenging without support from major players. The most distant target would be 1.1050.
In the event of a decline, strong buyer interest is expected around 1.0870. If no significant demand emerges at this level, a deeper correction toward 1.0840 or even 1.0800 could provide new long opportunities.
GBP/USD Technical Outlook
For GBP/USD, buyers need to break through the nearest resistance at 1.2960 to target 1.3010, where further progress will be difficult. The most ambitious target would be 1.3040.
If the pair moves downward, bears will attempt to regain control at 1.2940. A successful breakdown of this area would deal a significant blow to the bulls, pushing GBP/USD down to 1.2915 with a potential move toward 1.2875.
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