On Thursday, July 24, the European Central Bank will hold its July meeting in Frankfurt am Main. The central bank is almost certain to maintain all monetary policy parameters unchanged. Yet, despite the predetermined outcome, this is by no means a non-event. All traders' attention will be focused on the tone of the accompanying statement and the remarks of ECB President Christine Lagarde during the post-meeting press conference. If the balance of rhetoric tilts too much toward dovishness or hawkishness, EUR/USD will react accordingly.
Recall that following the previous (June) meeting, ECB President Lagarde stated that the central bank was "ready to pause the current easing cycle of monetary policy." The wording was somewhat ambiguous, leaving uncertainty over whether the ECB was ready to end the cycle (implying one more rate cut was possible) or whether it had already ended it.
Currently, there is no doubt in the market that the ECB will adopt a wait-and-see approach amid accelerating headline inflation. In June, the overall Consumer Price Index rose to 2.0% y/y (after 1.9% in May), while core inflation remained at the previous month's level of 2.3% y/y. At the same time, the main driver of core inflation — the services sector — accelerated to 3.3%. This figure is significantly above the ECB's core inflation target.
All this indicates that the ECB will, with 100% certainty, keep interest rates unchanged at the July meeting.
However, this scenario has already been factored into the market, so traders are likely to overlook the formal outcome of the meeting.
In essence, the agenda boils down to one key question: Is the ECB ready to resume rate cuts in September, or will the pause be extended until the end of the year?
For example, over half of economists surveyed by Reuters believe the next rate cut will occur at the September meeting. A Bloomberg survey of economists yielded similar results, although some experts suggested the ECB could delay the decision until December.
These relatively high dovish expectations could ultimately support EUR/USD — if they are not fulfilled. And that's quite likely.
In my view, the ECB will take a cautious stance and won't even hint at the possibility of a September rate cut, not only because of the acceleration in headline CPI and stagnation in core inflation, but also due to trade tariff uncertainty.
Today marks the beginning of a new round of trade negotiations between Washington and Brussels. Ahead of the meeting, rumors circulated that the Europeans may be willing to agree to a deal unfavorable to them (or more favorable to the U.S.) to break the deadlock and avoid the imposition of individual tariffs (up to 30%).
These talks are happening in the wake of several successful negotiations — the U.S. recently struck deals with Japan, and earlier with Indonesia, the Philippines, and Vietnam — fueling optimism in the markets about another positive outcome. However, a grim end is also possible: according to Bloomberg, the European Union is ready to impose 30% tariffs on American goods worth about €100 billion if a deal is not reached and the U.S. proceeds with its tariff plan. In total, Brussels intends to impose duties on a third of American exports to the EU, including U.S. cars and Boeing aircraft.
Given that the U.S. is the second-largest export market for the EU (having imported goods worth just over €584 billion last year), the economic stability of the European region is at stake.
In such uncertain conditions, the ECB is unlikely to make bold moves or dramatic statements. Excessive caution, in this case, is likely to be interpreted as supportive of the euro, increasing the perceived likelihood of an extended pause (at least until December).
In conclusion, the outcome of the July meeting may offer limited or temporary support to the euro (due to what I believe are overly dovish expectations). However, the tone of EUR/USD trading will still be largely dictated by the greenback. That means traders will continue focusing on two top themes:
- The trade negotiations
- The campaign against Jerome Powell, who is being accused of "mismanagement" and even perjury.
Unless the ECB delivers any surprises (which is unlikely), traders will likely shift their attention to these fundamental factors the very next day.
