Dovish ECB Meeting Minutes to Rattle EURUSD Rate Rebound

EUR/USD Rate Talking Points

EURUSD extends the rebound from the weekly-low (1.1193) as the Federal Reserve prepares US household and businesses for lower interest rates, but fresh developments coming out of the Euro area may rattle the recent advance in the exchange rate as the European Central Bank (ECB) endorses a dovish forward guidance for monetary policy.

Dovish ECB Meeting Minutes to Rattle EURUSD Rate Rebound

EURUSD may continue to retrace the decline from the June-high (1.1412) as fresh comments from Federal Reserve Chairman Jerome Powell indicate the central bank will adjust monetary policy at the next interest rate decision on July 31 as “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”

At the same time, the European Central Bank (ECB) may take a similar approach to insulate the monetary union even though the Governing Council prepares to launch another round of Targeted Long-Term Refinance Operations (TLTRO) in September as the central bank struggles to achieve its one and only mandate for price stability.

Recent remarks from ECB board member Philip Lane suggest the central bank will endorse a dovish forward guidance at the next meeting on July 25 as “substantial accommodation is still required,” and it seems as though the Governing Council will continue to push monetary policy into unchartered territory as Mr. Lane insists that the central bank has a “variety of tools” to shore up the monetary union.

Image of ECB interest rates

In turn, the account of the ECB’s June meeting may highlight a greater willingness to implement more non-standard measures, and the Euro stands at risk of facing a more bearish fate over the coming days if the Governing Council shows a greater willingness to implement a negative interest rate policy (NIRP) for the Main Refinance Rate, its flagship benchmark for borrowing costs.

With that said, speculation for lower interest rates in Europe may rattle the recent rebound in EURUSD, but more of the same from the Governing Council may keep the exchange rate afloat as the Federal Open Market Committee (FOMC) comes under pressure to reverse the four hikes from 2018.

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EUR/USD Rate Daily Chart

Image of eurusd daily chart

  • Keep in mind, the broader outlook for EURUSD is no longer tilted to the downside as both price and the Relative Strength Index (RSI) break out of the bearish formations from earlier this year.
  • In turn, EURUSD stands at risk for a larger correction as it breaks out of the range-bound price action from May following the failed attempt to test the 1.1000 (78.6% expansion) handle.
  • The pullback from the June-high (1.1412) appears to have finally stalled around the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) region, with the RSI highlighting a similar dynamic as the oscillator continues to track the bullish formation from earlier this year.
  • A break/close back above the 1.1270 (50% expansion) to 1.1290 (61.8% expansion) zone raises the risk for a move towards 1.1340 (38.2% expansion), with the next topside hurdle coming in around 1.1390 (61.8% retracement) to 1.1400 (50% expansion) followed by the 1.1510 (38.2% expansion) to 1.1520 (23.6% expansion) area.

For more in-depth analysis, check out the 3Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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