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EUR/USD. Flat, but with a bearish bias: traders remain cautious ahead of the Fed meeting
July 25, 2023 12:22 pmVideo
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By the end of Monday, the euro/dollar pair reached a price low that had not been seen in nearly two weeks, yet it could not break below the 1.10 level. To gain control over EUR/USD, the bears must overcome the support levels at 1.1050 (Kijun-sen line on the daily chart) and 1.1020 (middle line of the Bollinger Bands indicator on the same timeframe). However, despite the sharp price decline, the sellers could not manage even the relatively easier task. Yesterday’s low settled at 1.1060, after which the downward momentum subsided.
The main cause of the downward pressure was the weak PMI indices, indicating a deterioration in both the manufacturing and service sectors. All release components were in the “red zone,” with the German manufacturing index plummeting to 38 points, reaching a two-year low.
Today, EUR/USD buyers took the initiative and even attempted a corrective rally. However, once again, the macroeconomic statistics were not in their favor. After some fluctuations, the pair returned to test the support level at 1.1050.
In Germany, data from the IFO Institute for July was published today. Almost all components of the report indicated increasing pessimism among representatives of the German business environment, as they had a “red tint.” The overall IFO business climate index in Germany for this month decreased to 87.3 points (the weakest result since October 2022), despite the forecast of growth to 88.0 (in June, the indicator was at 88.6). The index has been declining for three consecutive months.
The economic situation index, another component of the IFO report, also entered the “red zone,” rising to 91.3 points in July with a forecast of growth to 93.0 (in June, it increased to 93.7). The critical point is the ongoing downward trend, as the indicator has declined for the fourth consecutive month, reaching its lowest value in July since February 2021. This disappointing result added pressure on the EUR/USD pair, nullifying the corrective rally.
Interestingly, traders overlooked an essential release yesterday that favored the US dollar. For the first time in a long time, the US manufacturing PMI entered the “green zone,” rising to 49.0. Although the indicator did not cross the key 50-point level, it saw a sharp increase after two months of active decline (in June, the indicator fell to 46.3 points). Despite this positive development for the greenback, EUR/USD sellers “reflexively” reacted to the release but failed to even approach the support level at 1.1050, let alone the crucial price barrier at 1.1020.
Market participants responded with caution to another publication that could have otherwise resulted in increased market volatility. This refers to the ECB report on bank lending in Eurozone countries. Experts from the European Central Bank conducted a study involving nearly 160 major banks. They found that the demand for loans from companies and businesses has reached its lowest level since the inception of such research (which began in 2003).
Overall, the EUR/USD pair maintains a bearish sentiment due to the release of weak PMI indexes and an unimpressive report from the IFO Institute ahead of the July ECB meeting. Among EUR/USD buyers, there is justified concern regarding the potential outcomes of the July ECB meeting. The prospects for further monetary policy tightening (following the July meeting), which were already uncertain, have become even more unclear, despite the rise in the core consumer price index in the Eurozone.
Meanwhile, the US dollar index has risen for six consecutive days as hopes for a “hawkish surprise” from the Federal Reserve persist. These assumptions are not baseless, considering the rhetoric of certain Federal Reserve representatives (specifically, Waller and Daly) following the release of inflation reports. They asserted that it is still premature to celebrate victory over inflation, let alone discuss rolling back the hawkish stance. Additionally, Mary Daly emphasized the strong growth dynamics of average wages. According to her, the Federal Reserve must continue raising interest rates to address the “inflation issue decisively.”
The dollar will receive substantial support if the accompanying statement after the July meeting aligns with this sentiment. Based on the performance of the US dollar index, traders do not rule out the realization of a “hawkish scenario.”
Nevertheless, despite the bearish sentiment on the EUR/USD pair, selling still appears risky. With crucial events on the horizon (the outcome of the July Federal Reserve meeting will be announced on Wednesday), any trading positions inherently carry an element of uncertainty, as the intrigue surrounding the Fed meeting persists, despite the formal outcome – a 25-point rate hike – being already known and factored into the market. At this point, it is advisable to maintain a wait-and-see position on the EUR/USD pair since the Federal Reserve could easily alter the fundamental outlook for dollar pairs by reinforcing or tempering hawkish expectations regarding its future actions.
The material has been provided by InstaForex Company – www.instaforex.com
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