EUR/USD: On the eve of an ECB Governing Council meeting

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The Dollar continued to gain a clear advantage against the Euro as a scenario of two federal rate cuts, one of which was almost a done deal in September, took shape.

The very encouraging signals on inflation indeed suggest a soft landing for the world’s largest economy.

“The easing of inflation has strengthened the assumptions of a first rate cut by the Fed in September,” summarizes Alexandre Baradez (IG France). The CME Group’s FedWatch tool now puts the probability of such a scenario at 92.50%. As a reminder, this valuable tool allows you to analyze the probabilities of changes in federal rates and American monetary policy based on the price of 30-day federal funds futures contracts.

For its part, the European Central Bank will conclude a meeting of its Governing Council tomorrow.

“Given the market’s high expectations for a further rate cut in September, the ECB should be transparent about the conditions for a further rate cut to help the market manage its expectations, which is not easy in a context of high uncertainty in the world, particularly in the United States,” said Patrick Barbe, head of investment grade fixed income in Europe at Neuberger Berman.

If a status quo on the “rent” of the Euro is enacted, any element of language allowing the timetable for the next decisions of the Bank based in Frankfurt to be refined will be dissected by the market.

Ahead of this monetary policy meeting, Konstantin VEIT, portfolio manager at PIMCO, predicts a meeting “without major events”.

“The strength of the labour market allows the ECB to take time to gather new information. As a result, the ECB is in no rush to cut rates further; decisions will be taken on a meeting-by-meeting basis, and the evolution of data over the coming months will determine how quickly the ECB withdraws additional restrictive measures.”

To follow across the Atlantic, housing construction starts and building permits at 2:30 p.m. and the monthly industry report at 3:15 p.m.

Yesterday, in the statistical chapter, investors had to deal with the publication of the ZEW index of confidence in the German economy, which fell less sharply than expected, to 41.8.

“The economic outlook for the eurozone’s largest economy is deteriorating. For the first time in a year, economic expectations for Germany are falling. The fact that German exports declined more than expected in May, political uncertainty in France and the lack of clarity regarding the ECB’s future monetary policy have contributed to this development,” commented ZEW President Professor Achim Wambach on the survey results.

Meanwhile, retail sales, which measure U.S. household consumption, remained stable in June compared to May, when a 0.4% decline was expected over the month.

At the end of the morning, currency traders took note of the data on consumer prices for the month of June in the Eurozone, with no deviation from the initial estimates, at +2.9% at an annualized rate excluding volatile items (food, energy, alcohol and tobacco).

At midday on the foreign exchange market, the Euro was trading against $1,0940 approximately.

KEY GRAPHIC ELEMENTS

In a strong volatility in week 27, the Euro / Dollar currency pair regained the upper part of a bearish oblique line, constituting a short-term oxygen supply. The technical signals are contradictory in the immediate future and do not allow a serene position-taking. In any case, we are suspending our sell lines. We are currently witnessing a test of a resistance level located at $1.0885.

MEDIUM TERM FORECAST

Considering the key graphic factors that we have mentioned, our opinion is neutral in the medium term on the Euro Dollar (EURUSD) parity.

We will maintain this neutral opinion as long as the Euro Dollar (EURUSD) parity rates are positioned between the support at 1.0906 USD and the resistance at 1.1012 USD.

DAILY DATA CHART