The European Central Bank is set to hold its September meeting on Thursday. On the one hand, none of the experts expects any action from the regulator: the parameters of monetary policy should remain at the same level. On the other hand, the previous signals indicate that the ECB members will take a rather "dovish" position, thereby putting significant pressure on the euro. Against the background of such uncertainty, the euro-dollar pair entered the area of the 17th figure but still hesitates to overcome the support level of 1.1730 to open the way to the 16th price level. The results of tomorrow's meeting will help traders determine the direction of further movement.
The September meeting of the ECB will be held against the backdrop of a slowdown in key macroeconomic indicators and an increase in the euro rate - both against the dollar and the pound. The updated Fed strategy, political battles in Congress, Trump's anti-Chinese rhetoric, and the uncertain pace of the US economic recovery led to a general weakening of the US dollar.
The EUR/USD pair, respectively, went up, especially after the EU countries were able to agree on an anti-crisis financial aid package. Since July, the pair has risen by 600 points, and if we take a wide time range - from the spring of this year - then the northern dynamics draw at a large scale by 1000 points.
The EUR/GBP pair is also flourishing which is mainly brought by the Brexit. Months of negotiations between London and Brussels did not bring any result, therefore Boris Johnson decided to give impetus to the negotiation process by setting a deadline and threatening to renegotiate the terms of an already concluded deal. This news background put the strongest pressure on the pound sterling, after which a rise in the EUR/GBP pair was observed.
In other words, the ECB's assets at the moment are the expensive euro and disappointing macroeconomic reports. According to the latest data, the European economy slowed down 11.8% in the second quarter and 14.7% in annual terms. This indicator was revised upward yesterday (the final estimate turned out to be slightly better than the initial one), but in fact, the situation has not changed: the coronavirus crisis has set an anti-record.
Furthermore, European inflation is also slowing down. The general consumer price index in the eurozone countries unexpectedly fell into negative territory, reaching the level of -0.2%. At the same time, the general forecast for inflationary growth was + 0.2%. The deflation in the eurozone was recorded for the first time since spring 2016. Core consumer price index (core inflation), which more clearly reflects consumer trends (thus excluding volatile and essential goods such as food, tobacco, and fuel) also slowed sharply from its July value of 1.2% to 0.4% in August. Experts expected a drop in this component by 0.8%.
The unemployment rate is also alarming. According to the latest data, it already went up by 7.9%. According to the forecast of the Trading Economics macro model, over the next eight months, the negative trend will continue and that unemployment in the eurozone will rise to 9%.
More recent data paint a contradictory picture. In particular, the German manufacturing PMI rose to 53 points (this is an annual maximum), but in the service sector it slowed down to 50.8 points, while a significant increase was expected to 55 points. The pan-European PMI indices followed the trajectory of the French indicators, which came out much worse than predicted values. In the manufacturing sector, the indicator slowed down to 51 points (after an increase of almost 53 points), in the service sector a decrease of 50.1 points was noted.
Thus, the latest trends indicate that the European economy is too slow to move away from the "coronavirus strike". At the same time, the euro rate against the dollar and the pound (to a lesser extent - against the franc) continues to grow, having a negative impact on inflationary processes and on the export sector.
In view of this fact, the European Central Bank, firstly, may express concerns about a further increase in the euro exchange rate, and secondly, adjust its inflation forecasts downward. Here one cannot but recall the comments of the ECB chief economist Philip Lane, who has already voiced such concerns. After his speech, the euro fell in price throughout the market, retreating from the highs reached. Most likely, the members of the regulator will increase the verbal pressure by focusing on the exchange rate value of the single currency.
In addition, the European Central Bank will, without any doubt, once again confirm its intention to stimulate the eurozone economy. In June, the anti-crisis asset buyback program was expanded and extended until the middle of next year. At the September meeting, Christine Lagarde may reiterate her phrase that, if necessary, the regulator will prolong the operation of this program, and, possibly, increase its volume.
Summing up the above, we can conclude that the results of tomorrow's meeting will not be in favor of the euro. Too many factors indicate that the rhetoric of the regulator's members will be "dovish", and the inflation forecast will be revised downward. This will allow the bears of the EUR/USD pair to actively break the price barrier of 1.1730 and go to the main support level of 1.1650 - this is the upper border of the Kumo cloud on the daily chart. The pair is unlikely to go below this target: firstly, a bill to help the US economy will be considered in Congress on Thursday(which will likely fail), and secondly, dollar bulls are in anticipation of data on the growth of inflation in the US (release will take place on Friday). Taking into account such events, we can assume that even in the case of the ECB's "dovish" results, the EUR/USD pair is unlikely to go below the middle of the 16th figure.
