FX.co ★ EUR/USD. ECB July meeting: Preview

EUR/USD. ECB July meeting: Preview

The European Central Bank's next meeting will take place on Thursday, the results of which may put additional pressure on the euro. The previous rhetoric of many ECB representatives suggests that the central bank will not only keep the current parameters of monetary policy in the same form, but also declare that the central bank will pursue an accommodative policy for a longer time.

Let me remind you that in early July, the ECB announced a strategic revision of its monetary policy. The previous policy provided for a very flexible target for inflation, which should have been "slightly below the two percent mark". Whereas, according to the new strategy, the target level was set strictly at the two percent mark. Moreover, the ECB has allowed the possibility of a "transition period", during which inflation may "moderately exceed" the target indicator. That is, under certain conditions, it may exceed the two percent target, and this fact will not entail the adoption of immediate retaliatory measures.

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EUR/USD. ECB July meeting: Preview

It is obvious that the new rules of the game will allow the ECB to maintain the current parameters of monetary policy even in the conditions of a sudden increase in inflation in the eurozone. However, at the moment, the growth rate of European inflation leaves much to be desired: the latest release on the growth of the consumer price index in the eurozone came out in the red zone. The general consumer price index slowed its growth in June, reaching 1.9% (after an increase to 2% in May). The core index, which was at the level of 0.9% (after the previous growth to 1%), also disappointed investors. Therefore, ECB representatives are not burdened with the need to conduct "explanatory work", justifying the central bank's soft position. Unlike the members of the Federal Reserve, who are trying to convince traders that the record increase in inflation in the US is temporary.

According to the general opinion of analysts, the ECB will keep all the parameters of monetary policy in the same form. However, analysts' opinions differ on the future prospects. There are two main scenarios, and both are not in favor of the euro. The first option includes a commitment from the ECB to accelerate the purchase of bonds under the RERR in the fourth quarter compared to the first quarters of the year. The second scenario assumes an increase in the volume of bond purchases under the previous less flexible incentive program (30 billion euros per month compared to the current volume of 20 billion euros per month). Earlier, representatives of the central bank reported that the volume of emergency bond purchases will be "above average" in the third quarter, and the next revision of the pace of implementation of the program will most likely happen at the September meeting. Tomorrow, ECB members can outline the trajectory of further actions.

In any case, there is no doubt that the ECB will confirm its intention to stimulate the eurozone economy tomorrow. The central bank will make it clear that it will pursue an accommodative policy for a longer time. The only question is whether these intentions will be specified tomorrow. And in this context, it does not matter whether an "enhanced" version of the incentive program will follow PEPP, or whether the central bank only announces a review of the pace of implementation of the RERR program. The very fact of the ECB's determination will put the strongest pressure on the single currency, and especially against the US dollar.

However, not all analysts agree that the ECB will decide on any specific statements at the July meeting. The fact is that the ECB will publish updated macroeconomic forecasts at the next – September – meeting. Given this fact, the central bank may postpone making decisions until this moment. If a "neutral" scenario is implemented tomorrow, the euro will receive temporary support against the dollar. But only temporary. The actual uncorrelation of the positions of the Fed and the ECB will continue to put pressure on EUR/USD.

According to a number of experts, inflation in the United States will show positive dynamics in the second half of the year, updating new highs. Many indirect signs (including the growing cost of housing costs) suggest that key inflation indicators will come out in the green zone, thereby justifying the hawkish expectations of investors. According to some currency strategists, the head of the Federal Reserve may announce the curtailment of the quantitative easing program as early as August, at the annual economic symposium in Jackson Hole. Such prospects keep dollar bulls, as they say, "in good shape".

Thus, in my opinion, the EUR/USD pair has not exhausted its potential in the context of further decline, although the bears could not impulsively overcome the powerful support level of 1.1750 (the lower line of the Bollinger Bands indicator on the daily chart). The bears tried to storm this price barrier three times, but in vain. Therefore, any more or less large-scale corrective pullbacks can now be used as an excuse to open short positions with the first target of 1.1750 and the main target (in the medium term) of 1.1700.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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