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Interest rates are rock solid, and the market is undercurrent
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market www.xmtraders.commentary]: Interest rates are rock solid, and the market is undercurrent." Hope this helps you! The original content is as follows:
On February 5 (Thursday), the European Central Bank (ECB) will hold its first monetary policy meeting in 2026. This meeting can be called the "wind vane" for recent euro trading.
For the trading side, whether interest rates are maintained is not the core. What is really worthy of close attention is the policy guidance released by the meeting, the long and short interpretation of the euro's trend by institutions, and the resonance effect of fundamentals and policies.
Core expectations of the meeting: Interest rates are "stable for five consecutive years", and the flexibility of rhetoric determines short-term fluctuations
The market has fully digested the expectation that the deposit facility rate (DFR) will remain unchanged at 2%. The core logic is that the current fundamentals of the euro area do not support policy adjustments - inflation is basically in line with the target, economic growth is at trend levels, the labor market is resilient, wage and service industry inflation continues to fall, and the European Central Bank has no reason to move interest rates rashly.
The trading side needs to focus on the "verbal flexibility" of the meeting statement: no new macroeconomic forecasts will be released at this meeting. The statement will most likely emphasize the idea of "meeting by meeting and data dependence". It will not give clear guidance on interest rate increases or interest rate cuts, and will also specifically mention that "all policy options are open."
Especially in the context of the recent continued appreciation of the euro, this vague statement is essentially a warning of "verbal intervention". If Lagarde focuses on the deflationary effect of a stronger euro in the press conference, it may suppress the short-term gains of the euro, and conversely, it will provide room for euro bulls to develop.
Bond market signaling: Interest rate spread changes dominate the short-term trading rhythm of the euro
The short-term trend of the euro is deeply bound to the interest rate spread changes in the Eurozone bond market.
The current yield curve of the European bond market has shown a steepening pattern. This signal directly affects the euro trading strategy: short-term yields have risen slightly in line with expectations of economic recovery, while long-term yields have risen sharply in response to expectations of additional issuance of German government bonds. The trend of widening long-term and short-term interest rate spreads has already taken shape.
At the trading level, this trend brings two clear ideas: First, maintain a net short position in German government bonds. Market sentiment has recovered, fiscal policy has increased, and the supply of government bonds has increased. The three factors are likely to push the German bond yields upward, thereby supporting the euro through interest rate differentials;
The second is to prefer to allocate peripheral bonds such as Italy, Spain, and Greece. These varieties rely on the resilience of their fundamentals (Spain benefits from falling energy costs, and Italy has the support of EU funds and stable fiscal discipline). There is still room for interest rate www.xmtraders.compression, and the strength of peripheral bonds will also indirectly boost the risk appetite of the euro. In addition, the prevalence of yield curve steepening strategies will also provide short-term support for the euro through interest rate differentials.
Institutional consensus and disagreement: the core of the long-short game on the trend of the euro
Many leading institutions have the characteristic of "divergence in consensus" in their trading judgments on the euro, which is also the key to clarifying subsequent transactions:
Consensus: PIMCO, Natixis Asset Management, TwentyFourAM and other institutions believe that the European Central Bank will not adjust interest rates in the short term, and the euro will not have a trend.
The core basis is that the Eurozone's forecast of 1.2% growth and 1.9% inflation in 2026 has supported the neutrality of interest rates. Even if the appreciation of the euro brings a deflationary effect, the European Central Bank will give priority to verbal intervention rather than immediate interest rate cuts. This means that short-term euro trading needs to be based on range-bound trading ideas, and it is not advisable to blindly chase long or short positions.
The area of disagreement is: "The impact of excessive appreciation of the euro." Generali Asset Management clearly stated that the effective exchange rate of the euro has exceeded the 1.6% increase predicted by the European Central Bank in December to 2.2%. For every 1% appreciation of the euro, inflation will fall by 0.04% one year later. Coupled with the external pressure of U.S. tariffs and trade www.xmtraders.competition from other countries, if the euro continues to strengthen, imported deflation may trigger interest rate cuts.
This view echoes the market speculation that "a stronger euro will force easing", and also means that there are hidden worries about the trend of the euro in the medium term - if the euro continues to appreciate, rising expectations for interest rate cuts may suppress its gains; conversely, if the euro pulls back and the risk of easing eases, there will be an opportunity for a rebound.
Fundamentals of economic recovery: the underlying support for the mid-term strength of the euro
Although constrained by policy signals in the short term, the mid-term trend of the euro still anchors the fundamentals of economic recovery.
The current Eurozone has shown clear signs of recovery: the www.xmtraders.comprehensive PMI has stabilized at 51.5 for two consecutive months, and GDP in the fourth quarter of 2025 increased by 0.3% month-on-month, which did not slow down as market expectations; consumer confidence in January hit a new high since the beginning of 2025, loan growth continues to improve, and the unemployment rate is at a historical low of 6.3%.
More importantly, Germany’s fiscalThe implementation of the "rocket launcher" policy, the continued slowdown in inflation, and the improvement of the global environment are all supporting the recovery of domestic demand in the euro area and the stabilization of the manufacturing industry.
These fundamental factors constitute the underlying logic for the mid-term strength of the euro, which also means that if subsequent economic data exceeds expectations, the euro will most likely break through the range and usher in a trend upward trend.
Trading risk warning: Three major variables may cause violent fluctuations in the euro
Whether it is a short-term shock or a mid-term recovery, euro trading needs to be alert to three major downward risks. Once an outbreak occurs, it may trigger a substantial adjustment in the market: First, the trade conflict escalates again, and weakening external demand will directly drag down the euro zone economy, thereby suppressing the European Union. Yuan;
The second is the fragility of the financial sector. If liquidity problems occur in the Eurozone banking system or bond market, it will trigger risk aversion and cause the euro to be sold;
The third is the further appreciation of the euro, which will intensify deflationary pressure and force the European Central Bank to release an easing signal, becoming the biggest "lightning point" for the mid-term trend of the euro.
Summary and technical analysis:
Taken together, this ECB meeting will not change the short-term fluctuation pattern of the euro. The trading side needs to focus on the statement rhetoric and Lagarde’s press conference to seize the opportunity of the euro’s range fluctuations.
As the U.S. dollar has fully reflected the end of the government shutdown recently, the successor to the hawkish Federal Reserve Chairman announced that the U.S. dollar may begin to fall, causing the euro to rebound slightly.
Technically, the euro has made major adjustments recently. It once pulled back 61.8%, which is a weak correction. It is currently relying on the original upward trend line. However, in the future, the euro may be difficult to maintain the recent high exchange rate, so the European Central Bank will most likely keep interest rates unchanged, because if the exchange rate cannot remain high for a long time, there will naturally be no deflationary pressure.
The above content is all about "[XM Foreign Exchange Market Review]: Interest rates are as stable as a rock, and the market is undercurrent". It is carefully www.xmtraders.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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