ECB Expected to Hold Amid Uncertainty

Despite the uncertainty surrounding trade negotiations, the ECB is expected to keep rates unchanged and may not cut again for the remainder of the year.

The Start of a Very Long Pause

Economists are unanimous that at its meeting on Thursday, a prediction that the market has already factored in. This is despite persistent uncertainty about whether a deal will be signed with the US to avoid 30% tariffs on US imports of products originating in the EU, a rate higher than the ECB's worst-case estimate. The EU is reportedly considering a series of retaliatory measures that include not only tariffs but also other measures, such as so-called "anti-coercion" measures. These include , or requiring licenses, which could further slow the transit of goods across the Atlantic.

ECB President Christine Lagarde has previously suggested that US . However, this was based on an understanding that the US imposed tariffs on the EU, not vice versa. The move would encourage suppliers who have been turned away from the US to increase competition in Europe. Lagarde has notably called for the EU not to raise tariffs and warned in the European Parliament that a trade war could negatively impact the shared economy by 0.3%. However, a resolution on the trade situation is unlikely to be known until after the meeting, and the ECB will have to decide in light of the current uncertainty.

No Pressure to Make a Policy Move

With the latest report showing that Euro Area inflation was precisely at the ECB's target of 2.0%, there is . The shared central bank isn't scheduled to update its macroeconomic projections, which means it could essentially repeat its prior policy outlook with a heavy emphasis on uncertainty. Around 60% of economists believe that a rate cut will occur in September, and the market will likely focus on whether Lagarde provides more concrete hints about how long the pause will last.

The EURUSD had been rising throughout most of the year, scoring a , despite racking up eight rate cuts during the easing cycle. An overly rapid appreciation of the currency could have been a complication for the ECB, favouring further easing. However, the pullback in July might have alleviated that concern for now. Economists suggest that the stronger euro could have deflationary effects, prompting rate cuts later in the year.

EURUSD Bullish Trend Remains Intact

Fibre has been on an upward track this week, staying above the middle Bollinger Band after mean-reverting to 1.1680 and resuming its trend, with a bottom along the 'autotrend' line near 1.1726. The RSI has just returned to a neutral level, which also offers potential for upward momentum. A continuation to the upside could face resistance at the upper Bollinger Band at 1.1768 if the ‘autotrend’ line at 1.1756 gives way to bulls, with a break above eyeing the round 1.1800 level. If the pair turns around, it could encounter support at the round 1.1700 level, followed by Tuesday's swing low at the middle BB.

Source: SpreadEx | EURUSD

Key Takeaways

There is unanimity in the markets and among economists that the ECB will hold rates unchanged at its July meeting, given that inflation is right on target. However, the uncertainty around the ongoing trade negotiations to avert a trade war with the US likely means that the statement will highlight uncertainty and not provide clear guidance for how long the pause will last. Economists are divided about whether there will be another rate cut this year, with some pointing to the appreciation of the euro potentially causing deflationary pressures later in the year.