18.07.202419:46 Forex Analysis & Reviews: EUR/USD. The results of the ECB's July meeting

The results of the July ECB meeting did not sit well with EUR/USD buyers. The price turned 180 degrees and headed towards the base of the 9th figure, although earlier today, the pair had marked the 1.0942 level. So, what did the European Central Bank do to provoke such a market reaction?

First, it should be noted that the pair is declining not only (or not so much) due to the weakening of the euro but rather due to the unexpected strengthening of the US dollar. The European regulator took a moderate and balanced position, without bias – neither towards the doves nor the hawks. By and large, the euro became a victim of the market's high expectations against contradictory data on inflation growth in the Eurozone and previous statements from ECB representatives. Judging by the reaction of EUR/USD, traders were ready to hear stricter wording, announcing the maintenance of a wait-and-see position at upcoming meetings (at least in September). Instead, they heard general phrases that, on the one hand, allow for a wait-and-see position but, on the other hand, do not rule out a rate cut as early as the beginning of autumn.

The formal results of the July meeting fully matched the expectations of most experts. The regulator kept all monetary policy parameters unchanged. In the text of the accompanying statement, the Central Bank indicated that it would continue to analyze incoming data and make decisions on a meeting-by-meeting basis, meaning there is no pre-agreed or priority trajectory for rate cuts. The ECB also retained the standard phrase that the Council will keep rates high "as long as necessary to achieve the inflation target."

In other words, standard formulations are nothing different from the text of the June meeting.

Christine Lagarde's press conference also left more questions than answers. The head of the ECB refused to comment on political events (the re-election of Ursula von der Leyen as head of the European Commission and the likely election of Trump), limiting herself to the standard response that "the ECB will closely monitor developments."

When she was directly asked about the prospects of lowering rates in September, she made a rather strange (in my opinion) statement: "Any decision could be made in September." Later, responding to a clarifying question, she noted that the issue of a rate cut in September "remains open," but the decision will depend on incoming statistical data.

Regarding the June CPI growth report in the Eurozone (which reflected a slight slowdown in the overall consumer price index and stagnation in the core index), Lagarde noted that the service sector continues to exert upward pressure on prices, with inflation at 4.1%. In addition, she lamented the active wage growth, adding that the pace of wage increases "is starting to slow down."

It should be noted here that the market highly assesses the chances of a rate cut in September – just yesterday, the probability of such a step was estimated at around 75-80%. Judging by the reaction of EUR/USD traders, market participants remain confident that the ECB will continue to cut rates in early autumn. Although Lagarde neither confirmed nor denied this, tying the September decision to the statistical data for July and August.

As mentioned above, the EUR/USD pair is declining not so much due to the weakening of the euro but the strengthening of the greenback. The dollar strengthened its position due to the unexpected and quite strong growth of the Philadelphia Fed Manufacturing Index (which jumped to 13.9 from a forecast of 2.7) and political events in the US.

The market is gradually getting involved in the American presidential race, reacting to key events of this "series." After the disastrous (for Joe Biden) debates and the assassination attempt on Donald Trump, the latter's chances of winning have significantly increased. This is good news for dollar bulls, as investors have established a clear link between Trump and the strengthening of the dollar, considering the prospects of inflationary protectionist measures, increased geopolitical risks (a new trade war with China), and tax cuts. For example, Deutsche Bank currency strategists equated Trump's return with future parity for the EUR/USD pair. Therefore, traders are reacting sharply to the most notable election campaign events.

For example, today, there was information that Joe Biden would still withdraw from the election, supposedly this weekend. High-ranking Democrats told Axios this on condition of anonymity. According to them, behind closed doors, the head of the White House has already resigned himself to the growing pressure and disastrous polling numbers, which make it impossible to continue his campaign. Additionally, it was revealed yesterday that Biden contracted COVID-19, complicating the difficult situation for the Democrat. In light of such news, the US dollar index rose from 103.36 to 103.72.

Thus, the euro came under pressure, as "hawks" were disappointed with the results of the July ECB meeting, although the issue of rate cuts in September is still unresolved. The dollar, in turn, is rising amid increasing risk-off sentiment. The market is gradually beginning to realize that the next head of the White House will likely be Donald Trump – even if Biden exits the race (according to some experts, in such a case, the Republican will have even more chances to win the election).

As a result, the situation for the pair is uncertain, as the market will quickly react to the "ECB factor," and political fundamental factors are generally short-lived. Therefore, it is advisable to rely on technical signals in this case. As we can see, despite the southern impulse, EUR/USD sellers could not consolidate below the support level of 1.0910 (the middle line of the Bollinger Bands indicator on the four-hour chart). If the bears do not push this target and move to the next price barrier of 1.0870 (Tenkan-sen line on the daily chart) in the near future (within a day), the pair will remain within the 9th figure, and buyers will regain the initiative. They now have one modest but achievable target – 1.0950 (upper line of the Bollinger Bands on the four-hour chart).