15.07.202400:25 Forex Analysis & Reviews: EUR/USD. Preview of the Week: "Trump Effect," ECB Meeting, and China's GDP

The upcoming week promises to be eventful. As early as Monday, the EUR/USD pair may exhibit increased volatility in response to the assassination attempt on US presidential candidate Donald Trump. Although this event has an indirect relationship to the currency market, traders may react to the shooting in Pennsylvania. This is primarily because Trump is now the clear favorite in the presidential race.

After the disastrous (for Biden) debates, the former president's rating started climbing, but now Trump may become unreachable for the Democrats, regardless of whether Joe Biden remains the candidate or is replaced by Kamala Harris (or any other contender from the Democratic Party). The likelihood of Trump's victory is now considered the "most probable" by bookmakers taking bets on the election results. Bets on the Republican's victory surged: if before the assassination attempt his chances were estimated at 58-60%, now they are at 70%. Commenting on the attempt, The Telegraph wrote that "it is the most significant moment in US politics in decades – and history tells us Trump will be on his way back to the White House".

The market is unlikely to ignore this event. As journalists from the Financial Times said that back in 1981, Republican President Ronald Reagan survived an assassination attempt, after which his rating also rose. On that day, the U.S. stock market fell before trading was closed early. The next day, the S&P 500 rose by more than 1%, and the yield on ten-year Treasury bonds fell by 9 basis points.

Of course, it is not accurate to compare events (and market reactions) from 43 years ago with today's realities. But the very fact that Trump is now "a hair's breadth from the presidency" is unlikely to go unnoticed by traders. It can be assumed that the dollar will react positively to the Republican candidate's position. For instance, the greenback broadly strengthened after the debates with Biden. Even then, ING currency strategists noted that investors "established a clear connection between Trump and the dollar's strength," considering the prospects of inflationary protectionist measures, increased geopolitical risks (trade war with China), and tax cuts. Deutsche Bank experts even equated Trump's return with the future parity of the EUR/USD pair. According to the bank's analysts, raising tariffs for China and other countries will have inflationary consequences for the US and disinflationary consequences for the rest of the world. Such a scenario, according to Deutsche Bank strategists, will significantly strengthen the dollar.

However, the upcoming week is not just about "Trump." For instance, on Monday we will learn key data on China's economic growth. According to forecasts, China's GDP volume in the second quarter will increase by 5.1% year-on-year after a growth of 5.3% in the first quarter. If, contrary to forecasts, the figure shows a downward trend (especially if it falls below the 5.0% target), the dollar may gain support amid rising risk-averse sentiments.

During the U.S. session on Monday, the Empire State Manufacturing Index (a survey-based indicator from manufacturers in the New York Federal Reserve district) will be released. Since December 2023, the index has been in negative territory, but in June it rose to -6.6 points. Positive dynamics are also expected in July (-5.5).

Also on Monday, Federal Reserve Chairman Jerome Powell will speak. Over the past two weeks, he has spoken several times – at the Sintra Forum and twice in the US Congress. But all his speeches were before the release of key inflation data. The U.S. Consumer Price Index was in the "red," while the Producer Price Index was in the "green." After these reports, the probability of a rate cut in September increased to almost 90%. There has also been talk about the possibility of another rate cut at the December meeting. If Powell takes a cautious stance and casts doubt on the prospects of two cuts in 2024, the greenback may receive significant support amid the market's overly high expectations.

On Tuesday, we will learn the value of the German ZEW indices (a downward trend is expected) and data on US retail sales. The latter is expected to decrease by 0.2%, while excluding auto sales, the volume is expected to increase by 0.1%.

On the same day, Federal Reserve Board member Adriana Kugler will speak. She may also comment on the latest reports in the context of the prospects for a rate cut.

On Wednesday, several macroeconomic reports will be published in the United States. In particular, we will learn about building permits in June (positive dynamics are expected). The volume of industrial production (forecast 0.4%, previous value 0.9%) and manufacturing output (-0.3%, previous value 0.9%) will also be announced.

In addition, on Wednesday, two Fed representatives will speak: Board of Governors member Christopher Waller and Richmond Fed President Thomas Barkin.

On Thursday, EUR/USD traders will be focused on the European Central Bank meeting. According to general forecasts, the central bank will maintain all monetary policy parameters following the July meeting. This is the base and most likely scenario. The intrigue remains regarding the ECB's future course of actions. Inflation in the eurozone slowed to 2.5% in June, while core inflation remained at 2.9% (against a forecast decline to 2.8%). Therefore, the prospects of a rate cut in September remain uncertain: in her speeches, ECB President Christine Lagarde has been cautious in her responses. It is expected that following the July meeting, the ECB will also try to avoid direct signals, but the scales should tip one way or another. The reaction of the single currency will be accordingly. If the central bank casts doubt on the rate cut in September, the euro will strengthen its positions across the market. Otherwise, the beneficiaries of the July meeting will be the EUR/USD bears.

On Friday, the economic calendar for the EUR/USD pair is not filled with important reports. However, several Fed representatives will be speaking that day. These include San Francisco Fed President Mary Daly, New York Fed President John Williams, Atlanta Fed President Raphael Bostic, and Fed Board of Governors member Michelle Bowman. Their assessment of the latest inflation reports could significantly impact the greenback.

Thus, the upcoming week promises to be volatile. Right from the first minutes of Monday, we will witness the market's reaction to the attempted assassination of Donald Trump. This is a kind of "black swan" event that could save the dollar from further decline. Furthermore, Fed representatives might throw a lifeline to the greenback if they express skepticism about another rate cut (after September) in December. A "red" report on China's GDP, as well as dovish outcomes from the ECB's July meeting, could turn the EUR/USD pair around.

In other words, it won't be boring. "Fasten your seatbelts" and get ready to dive into a new week.