The European Central Bank (ECB) announced today that it would keep interest rates unchanged, as it downgraded its inflation projections. This decision comes as part of the ECB's efforts to tackle high inflation levels in the Euro area.

According to the latest Eurosystem staff projections, inflation is expected to gradually decline over the next year before reaching the Governing Council's 2% target in 2025. The staff projects that headline inflation will average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025, and 1.9% in 2026. These figures represent a downward revision for 2023 and 2024 compared to the previous projections.

The ECB acknowledged that while inflation has decreased in recent months, it is likely to temporarily increase in the near term. Consequently, the central bank emphasized the need to maintain interest rates at their current levels for an extended period of time.

In terms of economic growth, the ECB expects a subdued performance in the near term, with the economy projected to recover gradually due to rising real incomes. The growth projections estimate a range from 0.6% to 0.8% for 2023 and 1.5% for both 2025 and 2026.

The ECB's decision and its downgrade of inflation forecasts highlight the challenging task facing the central bank, especially when compared to its counterparts such as the Bank of England and the Federal Reserve. The Eurozone's slow growth and technical recession indicate a potential need for more aggressive rate cuts in 2024.

The initial reaction to the announcement saw the EUR/USD currency pair experience a brief 30-pip increase towards the daily high around the 1.0940 level. However, the euro later lost some of its gains, leaving traders uncertain about the pair's future direction.

Looking ahead, the euro's performance against the US dollar will likely depend on its ability to surpass the key resistance level at 1.1000, while finding support at the 1.0700 level. These two levels are expected to keep the EUR/USD range-bound if a breakthrough fails to occur.

Retail traders' sentiment, as reflected in IGCS, indicates a majority of short positions on EUR/USD, with 55% of traders currently holding short positions. While contrarian analysis suggests the downside may be limited before the pair resumes its upward movement, the market sentiment implies a cautious approach.

The ECB press conference is set to begin shortly, providing further insights into the central bank's future monetary policy decisions and its outlook for the Eurozone economy.