EURUSD:ECB lifts its cards, neutral rate at 2%.

By Ion Jauregui - ActivTrades Analyst

The European Central Bank has stopped playing the guessing game and has officially revealed its “best-kept secret”: the neutral interest rate for the euro zone stands at around 2%, with a range of between 1.75% and 2.25%. This figure, which has been the subject of speculation for years, now marks the way forward for monetary policy in an environment where investors, and especially EURUSD traders, are seeking clarity amid volatility. For those who follow the markets closely, this announcement is key. The neutral rate is that level at which monetary policy exerts neither expansionary nor restrictive effect on the economy. At the current 2.75% after the last cut, the ECB statement makes it clear that, if economic conditions hold, the process of cuts will close in the summer at around 2%. This would imply three additional 25 basis point cuts over the next few meetings, which in our view is a firm step towards normalization.

Philip Lane, the ECB's chief economist, has previously stated that the debate on the neutral rate is becoming less relevant as rates approach a level at which they no longer hold back growth. In an environment of low inflation - with the target achievable in the summer - the central bank focuses on what is really necessary to sustain growth without overheating the economy. Luis de Guindos, for his part, has reiterated that although the concept of the neutral rate is very useful from an analytical point of view, in practice the ECB relies on other metrics, such as the bank survey, to set the price of money. Christine Lagarde, always at the center of ECB communication, helped dispel uncertainty by raising expectations of cuts, pointing out that the current path of monetary policy clearly points to a 2% floor by the summer. This clarity is especially valuable for traders, as it allows us to adjust our investment strategies in the EURUSD and fixed income markets. This data is a beacon of stability for the Euro. An environment in which rates are expected to converge to 2% suggests a potential revaluation of the Euro against the dollar, as investors move towards assets that offer a margin of stability. The projection of a more robust EURUSD is in line with the expectation that, from summer onwards, the ECB will stop cutting and stabilize at that neutral level, which could reshape the dynamics of capital flows in the eurozone.

On the other hand, from a macro point of view, this decision reinforces the idea that the ECB is confident in the European economy's ability to achieve a balance between growth and inflation. Traders should note that in a scenario of rate stability at 2%, the euro is likely to benefit from a more predictable environment, which in turn would positively affect cross-border trade and investment.

Technical Analysis
Looking at the chart, the EURUSD has been in a downtrend that diverted it to a low of $1.01766 on January 13, currently facing a range that positions it between this low and a ceiling of $1.05327. Currently trading at $1.03048, the POC zone is located in the area of $1.05 per euro. Looking at the pressure of the last few days, the RSI is currently oversold at 45.23%. The 3 smoothed averages reinforce the idea of a price sideways movement in a price zone that coincides with that of January 15 and can be seen on the chart. The current pressure seems to have been contained and has generated a strong resistance in the $1.03 area. Therefore, the data is consistent with a possible bullish bounce in the previously mentioned direction. Employing Fibbonacci, the price is below the 38.20% of the last strong retracement that pushed the price to lows, so there is plenty of room left until reaching the 61.80% ($1.04094) which is slightly above the checkpoint area.

In summary, the ECB's announcement not only clears up doubts, but also sets a clear framework for the near future: the rate cutting cycle is expected to conclude in the summer, leaving rates at a neutral 2% level. For the EURUSD and for markets in general, this is a sign of stability that will undoubtedly influence investment decisions and trading strategies in the coming months. With the clarity offered today by the ECB, it is time to adjust positions and prepare strategies for a horizon of greater certainty.





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