Daily Market Recap – EURUSD What to expect from the ECB tomorrow?

EURUSD is expected to remain stable ahead of tomorrow's ECB July meeting with the increasing risk that the ECB will adopt an accommodative tone. This should limit the euro dollar's rise ahead of the meeting.

Market participants are expecting the ECB to present a more concrete policy program to support the new target introduced by the bank. In January last year, the Frankfurt-based central bank began its first monetary policy review in 2003. However, the outcome had to be postponed in the wake of the coronavirus pandemic. The idea was to assess how to adapt the ECB's policies and tools to achieve its primary objective of price stability.

The ECB previously strived to achieve a level of inflation “below, but close to, 2 percent.” Going forward, following the conclusion of its review in early July, the official inflation target becomes 2%, with overshooting allowed. This change leaves more room for the European Central Bank to maintain its accommodative policy.

This suggests that, in practice, the market is not expecting a sharp rise in the euro due to the risk that the ECB is not sufficiently dovish

As such, a true hawkish surprise would likely require the ECB to stress the need to reduce asset purchases. An unlikely hypothesis is given the evolution of the delta variant and the risk it poses to the economic recovery.

Moreover, President Lagarde supports the accommodative monetary policy of the Eurozone and seems to have disarmed the German-led “hawks” in the ECB Governing Council.

The euro against the dollar is in a short-term downtrend below the 13- and 20-period descending moving averages. The risk is therefore to see the European currency return to its annual low of 1.1704.

However, several signals are appearing that could lead to a stabilization or an upward correction. The RSI is showing positive divergence and today's and yesterday's candlesticks are showing lower wicks than their bodies, which indicates the presence of buyers.

(Chart Source: Tradingview 21.07.2021)

The 1.1704 level could therefore contain the current decline. To regain positive momentum, however, prices need to get back above the last high at 1.18802 which also corresponds to the crossing of the 34-period moving average.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.