27.07.201809:18 Forex Analysis & Reviews: EUR/USD. Rumors rendered a disservice to the European currency

Long-term review

ECB President Mario Draghi has been in office for almost 7 years and will resign next year, but the market still can not get used to his way of presenting information, putting unrealistic hopes on him.

Yesterday, traders were disappointed that the head of the European regulator did not tighten his speech and "bring closer" to the date of the rate hike. And although Draghi announced yesterday an extremely predictable position, the market made "surprised eyes" after the euro exchange rate and the yield of 10-year bonds sharply went down. However, the large-scale fall of EUR/USD was avoided. Bears of the EURUSD were able to push the price only to the middle of the 16th figure, where the southern impulse choked and got stuck in the flat. Further decline occurred in the area of the 15th figure, which would look awkward and unfounded but the ECB head did not say anything new and confirmed the intention of the regulator to raise the rate within the next year.

However, the market decided again that "the glass is half empty" than the other way around. For some reason, traders reacted sharply to Draghi's words that the core inflation index (without taking into account the volatile prices for food and energy) is still at a rather low level. This fact was known to the market and the June Core Inflation Rate was revised from 1% to the previous 0.9% without a reminder from the ECB head. Although in his speech, Draghi reduced the level of uncertainty about the inflationary growth prospects and economic growth risks, stating that these "are largely balanced."

Exchange Rates 27.07.2018 analysis

The ECB head also paid attention to the agreements reached between Juncker and Trump, calling this event "a positive signal." Naturally, Mario Draghi showed caution here, saying that it is too early to draw any conclusions. After all, there was very little time left between Washington and Brussels since the "ceasefire" - and even the European Commission has not yet clearly formulated the details of the compromise reached. But in any case, Draghi's initial position on this issue was quite simple: "The lean world is better than the trade war," so he could not help but notice the positive impact of the Washington events. However, the market also ignored this fact, although, in my opinion, the prevention of a trade war between the US and the EU is much more significant than the current dilemma of traders - "when will the ECB raise the rate".

By and large, this temporary backlash became the catalyst for the decline in the European currency. The "hawkish" rumors that circulated on the eve of the ECB meeting created an artificial excitement around the supposedly harsher intentions of the regulator. Naturally, Mario Draghi did not confirm such conversations, thereby provoking the southern impulse of the EUR/USD. After all, for several weeks the press did not show encouraging notes that the rate could be raised earlier than the expected date, yesterday's meeting could well be viewed in a positive light.

First, the ECB is on the way to normalizing monetary policy - the deadline for the QE completion is not being transferred, the issue of rate increase will be considered next year. Secondly, Draghi noted the potential of the eurozone's economic growth and inflation indicators. Thirdly, the ECB head noted the improvement of foreign trade relations between the US and the European Union. Are these factors not a reason for strengthening the euro?

But the market is in some ways are emotional, so Draghi's habitual restraint and caution was perceived by traders in their own way, as a sign of a "dovish" attitude. On the other hand, such emotions are short-term in time and today the market participants will switch to American events. It's about releasing the data on US economic growth in the second quarter, in the context of the overall expectation of the Fed's July meeting to be held next week.

Exchange Rates 27.07.2018 analysis

According to preliminary forecasts, the volume of US GDP in the second quarter will grow to 4.1% after a 2% growth in the second quarter. The price index of GDP should also show a positive trend - 2.4% versus 2.2%. If this forecast is justified, the probability of a fourth rate increase at the end of this year will rise again. Donald Trump "reproaches" about the actions of the Fed will go to the background, and traders will fully focus on waiting for the July meeting of the American regulator.

Alternative scenario cannot be ruled out if the US economy does not reach its forecast values. In this case, Trump expressed his position and said that "we invest so much in the economy, and then the rates go up". With this option, the dollar will remain under pressure until the Fed meeting.

Exchange Rates 27.07.2018 analysis

From the point of view of technology, bear pairs need to stay above 1.1610 - this is the bottom line of the Bollinger Bands indicator on the daily chart. If the data on US GDP will go beyond expectations, the pair can test this target and even try to gain a foothold in the 15th figure. Otherwise, the pair will return to local highs, which are in the price area 1.1730.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Irina Manzenko,
Analytical expert of InstaForex
© 2007-2022
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