EUR/USD. Preview of the week. July meeting of the ECB and the fate of Mario Draghi

The EUR/AUD Pair May Have The Potential To Continue Its Decline

Relevance up to 17:00 2022-07-18 UTC+2 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

The euro-dollar pair ended the trading week at 1.0079, on the wave of another corrective rollback. The results of the past week are mixed: on the one hand, the EUR/USD bears for the first time in 20 years overcame the parity level, standing at 0.9953. On the other hand, they failed to settle in the area of the 99th figure. Such conflicting results can be interpreted in different ways. There is a version that the bears are gradually and carefully mastering the "new territory", because each subsequent downward momentum is stronger than the previous one. At first, the bears only approached the parity level, then they tested it (decreasing only two points below the 1.0000 target), and then unexpectedly plunged almost 50 points down, finding themselves in the middle of the 99th figure. And although in each case the traders came back, the offensive dynamics were tendentious.


Exchange Rates 17.07.2022 analysis


But there is another version, according to which the 1.0000 mark will become a springboard for a large-scale offensive to the upside, if the bears fail to settle below the parity level in the near future. If we consider this version as the basic version, then in this case the risk of "catching the price bottom" is quite large, especially if you open short positions under the 1.0000 target.

Perhaps, today the key issue for EUR/USD traders is the prospects for the development of the downward trend. We see that the bears rush to take profits below the parity level each time, without the risk of holding open short positions. This circumstance explains the undulating price dynamics last week. Traders need a powerful information impulse that would allow them to make a choice: either they are trying to settle below 1.0000 at their own risk, or they are choosing a protracted corrective path, with targets in the 1.0150-1.0200 area.

The central event of the upcoming week is the July meeting of the European Central Bank. Looking ahead, it must be said that the EXB in any case can only provide situational support to the euro, even if it implements an "ultra-hawkish" scenario. And all because of the strengthening of the dollar. After the publication of the latest release of data on inflation growth in the US, rumors began to spread actively in the market that this month the Federal Reserve will raise the rate by 100 basis points at once. These rumors intensified after the "northern neighbor" of the Fed - the Bank of Canada - unexpectedly decided on a 100-point increase. The head of the San Francisco Fed, Mary Daly, also spoke about raising the rate by 100 points at once. Her colleague - James Bullard - similarly did not rule out such a scenario.

In my opinion, the scenario of a 100-point increase is still a subject of discussion. On the other hand, the mere fact of such discussions increases the demand for the US currency (the well-known trading principle "buy on rumors..."). In any case, the ECB will look like an outsider: it is too slow, indecisive and cautious.

According to general expectations, the ECB will raise interest rates by 25 basis points next week. This was previously discussed by ECB President Christine Lagarde and a member of the Board of Governors, Olli Rehn, and many other representatives of the central bank. Almost all economists polled by Reuters (62 out of 63) are also confident in the 25-point hike. At the same time, most of them predict a rate hike of 50 basis points at the September meeting, after which at two subsequent meetings (in October and December) the central bank will increase the rate in 25-point increments, as a result of which the deposit rate will reach 0.75%.

The 25-point increase in July is fully priced in at current prices. Moreover, according to many experts, the ECB needs to increase the rate by 50 points at once this month in order to contain the abrupt inflationary growth. But, apparently, the central bank is not ready for such a step. Therefore, the main intrigue of the July meeting is the further pace of monetary tightening. If the central bank questions a 50-point rate hike in September, the euro will remain under strong pressure. In this case, the EUR/USD bears may again try to settle in the area of the 99th figure.In addition, according to Bloomberg, at the July meeting, the ECB will present an unlimited bond buying tool that will help markets "adjust to sharper and faster interest rate hikes than previously thought." However, the market ignored this information last week, despite the hawkish nature of this message.

In other words, the ECB can hypothetically provide situational support to the euro next week only if, for example, it unexpectedly decides on a 50-point rate hike or clearly announces such a move in the context of the September meeting. But the strengthening of the single currency in any case will be temporary, given the growing "information campaign" regarding the 100-point Fed rate hike.


Exchange Rates 17.07.2022 analysis


Also, traders of the EUR/USD pair next week should pay attention to the events that will unfold in Italy. Let me remind you that on Thursday Italian President Sergio Mattarello rejected the resignation of Prime Minister Mario Draghi. The former head of the ECB, who later led the "government of technocrats" in Italy, decided to step down due to the loss of support for one of the country's largest political parties, the 5 Star Movement.

According to Bloomberg, Draghi is still "determined" to leave office, and as early as next week, as he still does not have the support of all parties in the split coalition. According to journalists' insiders, the prime minister failed to reach a consensus within the ruling union of political forces. The likely political crisis that Italy will face could put additional pressure on the euro.

Thus, in my opinion, the EUR/USD pair has not exhausted its downward potential: the downward trend is still in force. At the same time, there is no consensus on the market whether the pair will be able to settle below the parity level in the near future. Therefore, excluding longs in principle, it is advisable to open short positions on corrective rollbacks, and have downward targets above 1.0000.


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The EUR/AUD Pair May Have The Potential To Continue Its Decline

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