In recent weeks, "hawkish" expectations regarding the European Central Bank's monetary policy for 2026 have been building in the market. Where did these expectations come from, considering the ECB recently concluded its rate-cutting cycle? In early December, one of the governors, Isabel Schnabel, stated that she did not rule out a rate hike next year. As soon as the market heard such a statement, it began to anticipate a tightening of monetary policy. Is this approach valid?

In my opinion, no. Schnabel merely allowed for the possibility of a rate hike under certain circumstances. It's no secret that any central bank is prepared to use its tools if economic circumstances change. Therefore, there are no hints or implications in Schnabel's words. The ECB governor simply indicated that such a scenario cannot be ruled out.

This week, Schnabel felt it necessary to clarify that she did not mean a rate hike in the foreseeable future. On the contrary, she reassured markets that monetary policy would remain unchanged for the foreseeable future. It's no secret that the ECB is, in fact, closer than other central banks to the first policy tightening in a long time, while the Federal Reserve and the Bank of England are likely to continue easing in 2026. But that does not mean that the ECB will necessarily raise rates.

It is important to remember that the key indicator currently influencing the ECB's decisions is inflation. If inflation begins to accelerate, policy tightening will become possible. If inflation continues to decline, a new round of easing will be required. Currently, inflation is hovering around the ECB's target level, and it is very difficult to say which direction it will take next year.

Therefore, I advise operating under the scenario where rates will not change at least until the summer. Consequently, the Euro may gain market support only against the backdrop of a weakening US dollar, as it has for much of 2025. The Fed will continue its easing cycle, which is a key factor in the growth of the Euro and other currencies.

Wave Analysis for EUR/USD:

Based on the conducted analysis of EUR/USD, I conclude that the instrument continues to build an upward section of the trend. Donald Trump's policies and the Federal Reserve's monetary policy remain significant factors for the long-term decline of the US dollar. The targets for the current section of the trend may extend up to the 25 level. The current upward wave formation is beginning to develop, and it is hoped that we are now observing the formation of an impulsive wave set, which is part of a global wave 5. In this case, growth is expected with targets around 1.1825 and 1.1926, corresponding to 200.0% and 261.8% according to Fibonacci.

Wave Analysis for GBP/USD:

The wave structure of the GBP/USD instrument has changed. The downward corrective structure a-b-c-d-e in C of 4 appears complete, as does the entire wave 4. If this is indeed the case, I expect the main trend section to resume its formation, with initial targets around the 38 and 40 levels.

In the short term, I anticipated the formation of wave 3 or c with targets located around 1.3280 and 1.3360, which corresponds to 76.4% and 61.8% according to Fibonacci. These targets have been reached. Wave 3 or c is continuing its formation, and the fourth attempt is underway to break the 1.3450 mark, corresponding to 61.8% according to Fibonacci. The target levels for the movement are 1.3550 and 1.3720.

Key Principles of My Analysis:

1. Wave structures should be simple and understandable. Complex structures are difficult to trade and often bring changes.
2. If there is no confidence in what is happening in the market, it's better not to enter.
3. There is no 100% certainty in the direction of movement, and there never can be. Don't forget about protective Stop Loss orders.
4. Wave analysis can be combined with other types of analysis and trading strategies.