Fundamental Euro Forecast: Bearish

  • The Governing Council of the European Central Bank will announce next Thursday its latest decision on monetary policy in the euro area and everything indicates that it will be one of the last major central banks to tighten its policy after the crisis caused by the pandemic of coronavirus and the recovery that followed.
  • If this continued accommodative stance is confirmed by the ECB and its President Christine Lagarde during its post-meeting press conference, the current EUR / USD weakness will likely persist even though some of this narrative has already been incorporated into the rate. exchange.

The price of the euro may weaken further

Next Thursday, the ECB will leave all its monetary policy parameters unchanged. However, his latest political announcement and President Lagarde’s next press conference will be far from routine. Speaking to Bloomberg TV last Sunday, she told investors to prepare for further guidance on monetary stimulus and signaled that new measures could be put in place next year to support the Eurozone economy after the end of the current emergency bond program.

Speaking fair after the ECB raised its inflation target to 2% and acknowledged that it could exceed the target, Lagarde said the Governing Council meeting on July 22 will have “some interesting variations and changes”.It’s gonna be an important meeting, she added, and gIn view of the perseverance that we must show to keep our commitment, the forward-looking orientations will certainly be reviewed. “

Unsurprisingly, this was followed by two days of EUR / USD losses and, after a brief respite on Wednesday, there were more losses on Thursday afterwards. ECB decision-maker Ignazio Visco told the same TV channel as the ECB should keep monetary ultra-easy policy to support the economic recovery in the Eurozone and insulate its financial markets from higher interest rates in the US.

It therefore seems certain that tThe ECB will review its policy this week at align it with its new strategy to allow inflation atget up above 2% for a period of time when interest rates are low. With priceWith growth well below that level for years to come, Visco said the ECB needs to keep borrowing costs low despite some temporary rebounds in inflation.

The key question remains: has all of this already been incorporated into the EUR / USD exchange rate? The ECB, along with the Swiss and Japanese central banks, was already seen as one of the more accommodating central banks, but EUR / USD is still well above its low of 1.1704 for the year on record. March 31st and it wouldn’t be a surprise. if it soon falls back to that level.

EUR / USD price table, daily period (January 4 – July 15, 2021)

Source: IG (You can click on it for a larger image)

Week ahead: consumer confidence and flash eurozone PMI

Once the ECB meeting is over, EUR / USD traders will still need to be on the lookout for some important data points. First, data on consumer confidence for the euro area on the same day, but most important will be the “flash” indices of purchasing managers for the euro area and its member states in July. As always, readings above forecast will be positive for EUR / USD and readings below forecast will be negative.

— Written by Martin Essex, Analyst

Do not hesitate to contact me on Twitter @MartinSEssex

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