Contrary to the expectations of many traders, the euro-dollar pair did not collapse in the embrace of the 10th figure as a result of the July meeting of the European Central Bank. On the contrary, after reaching the new annual low (1.1102), the pair grew slightly and even emerged at the boundaries of the 12th figure.
By and large, EUR/USD bears became hostages of their own expectations. Today's meeting of the ECB was preceded by many events, most of which increased the likelihood of aggressively easing monetary policy parameters. Some of the analysts (in particular, currency strategists of the German bank Commerzbank) warned their clients that the European Central Bank could begin concrete actions in July - so to speak, "without a declaration of war". But most analysts still tended toward a more moderate version - they believed that Mario Draghi would prepare the markets for the corresponding steps, and at the September meeting, it would lower the interest rate and resume the stimulating program. Considering such assumptions, traders got rid of the euro "ahead of schedule", laying in prices of the softest version of the July meeting.
But the reality was somewhat different. Mario Draghi stunned the market with words that the members of the regulator at the last meeting did not discuss the issue of an interest rate reduction at all. In addition, according to him, the probability of a recession is "quite low", while further growth of the labor market supports the eurozone economy. The head of the ECB noted a relatively stable growth in employment, as well as an increase in wages. In addition, contrary to rumors circulated, members of the European regulator did not update the ECB's mandate on inflation. Let me remind you that on the eve of the European press, information appeared that the central bank will reduce the target inflation rate, which is now "slightly below" two percent in the medium term. Such a step would create conditions for a long period (longer than the market suggests) the use of incentive programs. However, Mario Draghi today unequivocally stated that such actions by the regulator are unacceptable, thus refuting the above rumors.
Thus, the head of the ECB did not strengthen the downward trend of EUR/USD with his rhetoric, disappointing the pair's bears. Nevertheless, it should be immediately emphasized here that his stance did not have a "hawkish" character. Draghi did not justify the hopes of the pair's sellers, but at the same time he did not give any reasons for reversing the trend. On the contrary - he confirmed that the accommodation policy should be maintained for a long period of time, and further steps of the regulator will depend on the incoming data. Draghi noted that regulator's members need to see updated forecasts, after which it will be possible to talk about any specific actions.
In addition, it should be noted that the regulator has changed some of the wording in the text of its accompanying statement. In particular, members of the ECB indicated that key interest rates would remain at "current or lower levels" at least until the end of the first half of 2020, and in any case, until inflation approaches the targets. Until today's meeting, the regulator has announced that it will maintain the status quo throughout the designated period. In other words, the European Central Bank actually warned the markets that rates could be lowered at any upcoming meeting, until June next year.
In addition, members of the Board of Governors assured market participants that they will resume QE if medium-term inflation forecast continue to not meet the goal. During his press conference, Mario Draghi also made it clear that, if necessary, the central bank will resume its bond purchase program.
What conclusions can be drawn from today's meeting? The main conclusion is that the members of the ECB are ready to apply a whole arsenal of actions available to them, including a reduction in the rate and the resumption of QE. In this case, traders were not mistaken in their expectations. However, the ECB will not take decisive action "automatically" - with the onset of autumn. The regulator continues to focus on key macroeconomic indicators - unemployment, wages, inflation, production, foreign trade, domestic demand, consumer activity and business confidence. This list is not exhaustive, but if most of the listed indicators in the near future (within two to three months) will go out in the "red zone", the European Central Bank will without hesitation begin to soften the parameters of monetary policy. And without any warning, because today the regulator has unambiguously indicated his intentions - both with the help of the accompanying statement and with the help of Mario Draghi.
The reaction of EUR/USD traders to the outcome of the July meeting is emotional, impulsive and short-term. This reaction is due only to the fact that the market "screwed" itself on the eve of the meeting, responding to the relevant rumors, the dynamics of the PMI indices and the rather pessimistic report of the Bundesbank. It is likely that emotions will settle down today, and the market will reconsider its position regarding the prospects for the euro. In my opinion, in the near future, the pair will again take a course towards the low of the year, that is, towards the bottom of the 11th figure, with subsequent testing of the 10th figure.
In general, the fate of a downward trend in the EUR/USD depends largely on the US currency's behavior. The dollar, in turn, depends on tomorrow's release on US GDP growth in the second quarter and the outcome of the Fed meeting on July 31. If the GDP figures are better than expected, the pair will continue to decline to the indicated levels - otherwise, the bulls will receive another reason for correction in the area of the 12th figure. But in any case, the pair's growth will depend on the degree of the dollar's weakness - the single currency did not have any arguments for revaluation.
