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EUR/USD. Overview for July 28th. Christine Lagarde’s mention of a pause led to a sharp drop in the euro
July 28, 2023 5:22 amVideo
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The EUR/USD currency pair will resume its upward trend on Thursday. To recall, the day before, after the Federal Reserve meeting and Jerome Powell’s speech, the American currency weakened, although both events were moderately hawkish. An additional 0.25% raised the interest rate, and Jerome Powell hinted at further tightening monetary policy in 2023. Despite this, the dollar has been steadily declining for the past ten months, raising questions about the recent unfair decline in the dollar. On Thursday, the euro took its turn to fall, as the market had already priced in the most hawkish scenario concerning the ECB.
Let’s delve into the fundamentals a bit further. Currently, the resumption of the global upward trend is postponed, and there is a possibility that it might end. Few factors support the euro’s long-term growth, especially since Christine Lagarde has openly mentioned a pause. A few months ago, we emphasized the ECB’s limitations compared to the Federal Reserve and the Bank of England. The European regulator must consider the economic conditions of 27 countries, striking a balance between strong and weak states. Historically, the ECB has raised rates less aggressively than its American and British counterparts.
Hence, even if the euro previously rose on inflated expectations regarding monetary policy, now this factor seems neutralized. The pair dropped below the moving average line, indicating a potential continuation of its decline. The euro remains heavily overbought, and significant corrections have been absent in the past ten months.
Lagarde’s rhetoric has turned out to be “dovish.”
Christine Lagarde has openly stated that the European regulator may pause in September. In essence, this single statement dominated market sentiment. Lagarde clarified that rates would remain accommodative as long as necessary, and rate decisions would be based on incoming macroeconomic information. However, if the ECB had room for further tightening, its head would have indicated such intentions. Rates of 4.25% would not be sufficient for a swift return of inflation to 2%. The ECB is now prioritizing long-term price stability, a move the market needs to receive better.
Although the ECB may raise rates 2 or 3 more times, representing significant tightening, the market no longer believes in an aggressive tightening scenario. As a result, there is disappointment in the market. This situation could mark a turning point for the EUR/USD pair, as the euro’s prolonged rise has been inexplicable. We have repeatedly observed that the dollar falls almost every time the Fed actively raises rates. Perhaps the market had already factored in all the tightening measures in the United States, which explains why it did not do the same with the ECB’s rates. Based on this simple question, the euro should decline, possibly reaching 1.05.
Christine Lagarde also assured that any pause, if it occurs, will likely last only a short time. The ECB head discussed inflation, business, economic activity, and low external demand, but we consider GDP to be the key indicator. The Eurozone’s economy is not growing, and business activity in the manufacturing sector remains below the “waterline” and continues to decline. It is crucial to consider the economy’s status now to avoid the need for a new QE program in a year to stimulate it and reignite inflation. Therefore, Lagarde’s rhetoric can be characterized as “dovish.” As expected, the euro fell, and the market will likely lose faith in it in the coming months.
As of July 28, the average volatility of the euro/dollar currency pair over the past five trading days is 89 points, classified as “average.” Accordingly, on Friday, we anticipate the pair to move between the levels of 1.0887 and 1.1065. A reversal of the Heiken Ashi indicator upwards would indicate a new wave of upward correction.
Nearest support levels:
S1 – 1.0925
S2 – 1.0864
S3 – 1.0803
Nearest resistance levels:
R1 – 1.0986
R2 – 1.1047
R3 – 1.1108
Trading recommendations:
The EUR/USD pair has resumed its downward movement and has again fallen below the moving average. It is recommended to maintain short positions with targets set at 1.0925 and 1.0887 until the Heiken Ashi indicator shows an upward reversal. Long positions will only become relevant once the price is established above the moving average line, with targets at 1.1108 and 1.1169.
Explanation of the illustrations:
The material has been provided by InstaForex Company – www.instaforex.com
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