EUR/USD: on the eve of the ECB meeting
In addition to the dollar, the euro has unexpectedly become one of the leaders in the foreign exchange market in the past few days. It rallied sharply in cross pairs, including against the pound and major commodity currencies. Paired with the dollar, the euro is still inferior.
At the time of publication of this article, the EUR / USD pair is traded near the 1.1795 mark, remaining under pressure and maintaining a tendency to further decline.
Among the main factors that have a negative impact on the pair, there is a strengthening of the dollar and an increase in demand for it as a protective asset in the conditions of continuing uncertainty and the continuing spread of the coronavirus.
The DXY dollar index has been climbing for the second month in a row, and at the time of this posting, DXY futures are traded near 93.05 mark, which is in line with early April levels.
Fed leaders find it increasingly difficult to contain the strengthening of the dollar. Thus, market participants practically ignored the recent and more than once repeated statements by the head of the US Federal Reserve, Jerome Powell, that the rise in inflation is a short-term phenomenon, and “the time has not yet come for reducing incentives”. Speaking to Congress last week, he said there was still a long way to go to cut monetary stimulus as the labor market was struggling to get over the effects of the pandemic.
More and more investors are starting to cut short dollar positions. If inflation in the US continues to accelerate, then sooner or later the Fed will still have to react to this by starting to cut the stimulus program.
This week the ECB will host its next monetary policy meeting. The bank will publish its decision on rates on Thursday at 11:45 (GMT).
It is widely expected that following this ECB meeting, the key interest rate will remain unchanged at 0%. The ECB's rate on deposits for commercial banks is also likely to remain at -0.5%.
According to the bank's management, the balance of risks for the economic prospects of the Eurozone "is still shifted in the negative direction". Earlier in July, the central bank announced it was changing the definition of its inflation target from "just below 2%" to 2%. It's not clear yet, by what measures will this level be achieved, however, the new strategy of the ECB presupposes a soft monetary policy for a longer time.
At the same time, there is a possibility that at this meeting the ECB will announce a new program to stimulate the economy, which will put new pressure on the euro.
One way or another, the prospects for the movement of the EUR / USD pair in the current situation are shifted to the negative side.
But in any case, at the time of the publication of the ECB's decision on the rate and, especially, during the press conference following the meeting on Thursday, one should expect an increase in volatility in the euro quotes and, accordingly, in the EUR / USD pair, if the ECB leaders make unexpected statements. The ECB's press conference will also begin on Thursday, at 12:30 (GMT).
The softer tone of the statements will have a negative impact on the euro. ECB executives, for example, can announce their intention to increase the volume of the emergency PEPP bond purchase program in the second half of the year, as well as promise that this program will be followed by a larger program of asset purchases. Conversely, which seems unlikely, the tough tone of the ECB officials on the monetary policy of the central bank will strengthen the euro.