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Euro-dollar rate awaits ECB policy update

19 Jul 2021

The outlook for the euro-to-dollar rate is pending Thursday’s policy update from the European Central Bank (ECB), which will be key as to whether the euro can hold above close support at 1.1777, or whether it accedes to an advancing dollar.

The euro kicked off the week over 1.18 and maintained its resilience in light of a six-week advance by the dollar. Indeed, the euro-dollar rate temporarily tested a key technical support level around 1.1777 last week before rallying.

“EUR/USD has so far held over the 2020-2021 support line at 1.1777 on a closing basis. It is trying to stabilise, but will face tough overhead resistance at 1.1884/95, the highs from last week and the 23.6% retracement. 

Currently the Elliott wave count is implying the rally is corrective only and is likely to terminate around 1.1940,” stated Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

However, the euro’s outlook depends on this week’s decision by the European Central Bank, the market’s subsequent reaction and whether or not the greenback keeps edging higher.

“We look for a limited upside to trade-weighted dollar next week. Not only is it a fairly calm week on the U.S. data front (suggesting limited catalysts for a domestically driven USD rally), but the possibly cautious / dovish ECB next week can provide a boost to cyclical FX, which would also spill over into the USD crosses (though EUR/USD would still decline),” according to Petr Krpata, ING chief EMEA strategist for FX and interest rates.

The market will be firmly focused on the ECB’s decision on Thursday, to hear what the new, higher and “officially symmetric 2% inflation target” will indicate for its monetary policy, reports Pound Sterling Live.

“Decisive ECB policy action to back up the new policy framework could trigger a fresh EUR sell off next week at a time when other major central banks (BoE and Fed) are moving closer to raising rates. A failure to act would provide some relief for the EUR,” says Derek Halpenny, MUFG’s head of research, global markets EMEA and international securities.

"It would be underwhelming if the ECB just updates their forward guidance," he added.