The penultimate week of July promises to be volatile for EUR/USD pair And although the upcoming trading days are not saturated with macroeconomic releases, certain events will have a significant impact on the mood of traders. In particular, the European Central Bank will put an end to the lengthy debate about the prospects for the ECB's monetary policy, and US economic growth data will either increase or alleviate concerns about possible Fed actions at the next meeting. In addition, minor macroeconomic statistics will serve as a backdrop to the main events of the week, complementing the overall fundamental picture. However, first things first.
Monday's economic calendar for the pair is almost empty. Perhaps, interest is on the monthly report of the Bundesbank. In this document, the German Central Bank assesses the current economic situation in the country and the eurozone as a whole. As is known, the German economy is leading among the eurozone countries, so traders closely monitor the dynamics of the main German indicators. Special attention will be paid to inflationary expectations. If the Bundesbank significantly reduces the forecast values, it could adversely affect the euro, especially on the eve of the July meeting of the ECB. According to rumors, the Central Bank will revise (reduce) the target inflation rate, which is now "just below" two percent in the medium term. If the Germans are ahead of the ECB in this context, it will be a negative signal for the single currency.
In addition, the focus will be on the problem of reaching the US debt ceiling due to the lack of important Macro-statistics on Monday. Let me remind you that Finance Minister Stephen Mnuchin notified the Congress leadership last week, saying that the government could run out of money already in early autumn if the congressmen do not vote to raise the national debt ceiling until August. Although on the weekend, Trump expressed confidence that politicians will find a compromise and adopt a resolution but many experts do not share his optimism. This topic has always been a kind of testing ground for the political opposition of Democrats and Republicans.
In the present conditions, the struggle of interparty may intensify in the light of the upcoming presidential elections. In addition, congressmen will most likely be alarmed by the exclusively economic aspect of this issue. Thus, the budget deficit jumped immediately to 22.6% over the past year. For the first 9 months of the last fiscal year from October 2018 to June 2019, expenses grew much faster by + 6.6% than revenues by + 2.7%. These are primarily due to an increase in allocations for defense and maintenance government debt. Such dynamics cannot be ignored by Congress, especially in the context of the projected decline in the US economy in the second quarter.
This is the reason why the Friday release (July 26) will become an important test for the dollar. According to general forecasts, the US GDP growth in the second quarter of this year will slow down significantly up to 1.8% (after a rise of 3.1% in the first quarter). If this forecast comes true, it will be the weakest growth rate since the fourth quarter of 2015. Also, according to the updated forecasts of the New York Federal Reserve Bank published last Friday, the GDP indicator will be lower than the forecast level of 1.4%. In any case, traders will view the Friday release through the prism of possible actions by the Federal Reserve, whose meeting will take place in the last days of July. If the indicator comes out much worse than the forecast values, the probability of aggressive monetary policy easing will increase again. This puts pressure on the US currency.
But the single currency will be completely "subservient" to the results of the July meeting of the European Central Bank (which we will learn on Thursday, July 25). According to analysts, the ECB will maintain the status quo but at the same time set the stage for easing monetary policy at one of the autumn meetings. What kind of action arsenal involves the regulator is an open question. According to one version, the Central Bank intends only to restart the program of purchasing government bonds in November, which the market will warn about this coming Thursday. According to another version, the ECB will reduce the rate by 10 basis points already in September, while allowing another decrease at the December meeting.
There are also more radical options: for example, some currency strategist at the German bank Commerzbank warned their customers that the regulator may reduce the rate by 20 points at the July meeting. However, most experts are inclined to the combined scenarios (rate cut by 10 bp + the resumption of QE in September or October). Hence, reaction of the pair will depend on how large and long-playing the incentives are. In particular, if the ECB does indeed revise its inflation target, such a step will create conditions for a long period (longer than the market suggests) for the use of incentive programs. In this case, the euro will weaken throughout the market, including with a pair of greenbacks.
Thus, the second half of the upcoming week promises to be rich. The July meeting of the ECB will set the vector of movement of the European currency, while the release of data on the growth of the American economy will have a significant impact on the dollar. These events are unlikely to set a new trend for the pair (since there is still a Fed meeting ahead and Trump's possible reaction to the possible strengthening of the dollar). However, they will surely "stir up" the pair, which has been fluctuating in a 100-point flat for several weeks.
