EUR/USD Outlook Hinges On ECB Guidance Following Strategy Review

EUR/USD trades to a fresh monthly low (1.1752) as it extends the series of lower highs and lows from the start of the week, and the European Central Bank (ECB) interest rate decision may keep the exchange rate under pressure if the Governing Council retains the current course for monetary policy.

EUR/USD OUTLOOK HINGES ON ECB GUIDANCE FOLLOWING STRATEGY REVIEW

EUR/USD continues to approach the March low (1.1704) on the back of US Dollar strength, and the Euro may continue to depreciate against the Greenback as the ECB is widely expected to keep the main refinance rate, the benchmark for borrowing costs, at zero.

Image of DailyFX economic calendar for Euro Area

As a result, market participants are likely to pay increased attention to the forward guidance following the ECB Strategy Review as the Governing Council plans to achieve a symmetric 2% inflation target over the medium term, and the central bank may signal a looming shift in monetary policy as President Christine Lagarde pledges to “redefine our forward guidance to align it with the strategy review.”

The recent remarks from President Lagarde suggest the ECB is on track to shift gears as the June 2021 Eurosystem staff macroeconomic projections showed an upward revision in the inflation outlook for 2021 and 2022, and a material change in the forward guidance for monetary policy may spark a bullish reaction in EUR/USD if the central bank lays out a tentative exit strategy.

However, more of the same from the ECB may drag on the Euro if the Governing Council continues to expect “net purchases under the PEPP (pandemic emergency purchase programme) over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” and a further decline in EUR/USD may continue to fuel the shift in retail sentiment to largely mimic the behavior from earlier this year.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 58.06% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.38 to 1.

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