In October, the President of the European Central Bank (ECB), Mario Draghi, will cede his post, Christine Lagarde. If we proceed from the fact that currency wars are coming and the central banks' policy will become a weapon in them, the head of the ECB has an important task - to prepare its arsenal for its successor to repel possible attacks by the Fed.
It is assumed that at the July meeting, the results of which will become known today, the European regulator will give the answer: with what, to what extent and consistency will it begin to soften the monetary rate.
Intrigue adds the fact that in less than a week, the Fed will issue its verdict on monetary policy. Obviously, there is no question here: keep the interest rate unchanged or lower it. However, it is still unclear how much the American Central Bank is ready to cut the rate: by 25 or by 50 basis points at once? Therefore, market participants do not exclude that M. Draghi will have the will and ingenuity to turn the course towards easing now. However, the dynamics of EUR / USD suggests that capital flows continue to the United States due to a stronger economy and higher interest rates. This allows the ECB to choose the role of the slave in the correspondence fight against the Fed.
For this reason, the basic scenario is still the lack of action by the European regulator at the moment and a clear signal that it will act in September. It is expected that the ECB may make changes to the "leadership in advance," namely, in the phrase "key rates will remain at the current level until the first half of 2020" the words "or will be lower" will appear. The deposit rate can go down by 10 or even 20 basis points from the current -0.4%.
In addition, the specifics of the ECB leadership's earlier words about restarting the quantitative easing program (QE) are more concrete, especially since there are grounds for this: inflation in the region remains sluggish, while inflation expectations have broken through those levels when the European Central Bank first began to soften monetary policy. If M. Draghi signals this, then additional pressure in euros cannot be avoided. If he tries to walk on this issue in passing - the reaction of the single European currency will be restrained.
According to David Kohl, currency strategist Julius Baer, the EUR / USD pair can get support if the ECB changes the strategy of promulgating further policies that would indicate the likelihood of lower rates and a resumption of asset purchases.
"Switching the attention of markets to the upcoming Fed meeting, the likelihood of lower rates following which is very high, can also push the euro up," said the expert.
He predicts that in the next three months, the euro to the US dollar will be at the level of 1.13.
Meanwhile, the Fed has the opportunity to respond to the actions of its European counterpart only on July 31. Now came the so-called "period of silence", which, however, was not without its roughness. Although, perhaps, it was a trial balloon, a kind of test of the sensitivity of the market.
Last week, the president of the New York Fed John Williams said that with the slightest signs of a slowdown in the economy, interest rates should be quickly and sharply reduced and the amount of incentives increased. The market interpreted these statements so that at the end of July, J. Williams would like to see a decrease in the interest rate in the USA by 50 basis points at once. However, after this, the New York Federal Reserve Bank reported that it was about theory without reference to the current situation. As a result, the market began to doubt the aggressive monetary expansion by the Fed.
The rate of -0.25% at the end of July from the Fed is not likely to be a surprise to investors and is unlikely to contribute to a strong increase in EUR / USD.
Since the beginning of the month, the euro has fallen by almost 2% against the US dollar against the background of strengthening hopes that the ECB may soften its monetary policy due to the slowdown in the European and world economies.
If according to the results of the July meeting, the rhetoric of the European regulator turns out to be sufficiently "pigeon", then the EUR / USD pair can break through the local "bottom" at 1.1106. If the position of the ECB officials is non-binding, then EUR / USD may well rebound from two-month lows.
Another reason for the elimination of the "shorts" for the euro after the meeting of the European Central Bank will be the expectations of a weak preliminary estimate of US GDP for the second quarter, which will remind everyone that, in addition to the ECB, there is also the Federal Reserve using this report to justify their actions in the future.
In the near future, a rebound in the GBP / USD pair may also be formed . As expected, Boris Johnson became the new leader of the Conservative Party of Great Britain and the country's prime minister, who had earlier promised to withdraw Misty Albion from the EU at any cost. However, the British Parliament, approving one amendment, made this option illegitimate. Besides, according to rumors, Brussels is ready to make certain concessions to London. Therefore, B. Johnson's harsh statements are clearly useless, as he may be confronted by extraordinary general elections, where the prime minister's chair is hardly "shining."
The pound sterling now looks oversold, at least against the euro. Since May, the EUR / GBP pair has risen by four figures, and after 11 weeks of growth there are prerequisites for its correction. In tandem with the US dollar, the British currency is still weak, and the turn is still not visible.
