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Euro US Dollar (EUR/USD) Outlook Fragile as ECB Decision Could Undermine Euro’s Recent Gains

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EUR/USD Exchange Rate Struggles for Direction Today as Potentially Dovish ECB Caps Euro Gains

The Euro US Dollar (EUR/USD) exchange rate is forecast to trade sideways or lose ground this afternoon depending on the European Central Bank’s (ECB) latest forward guidance. The Euro (EUR) climbed yesterday against the US Dollar (USD) as a risk-on mood emerged with firms – including those in sectors related to the reopening – posting upbeat forecasts.

At the time of writing, EUR is trading at USD$1.1785, virtually unchanged from this morning’s opening levels.

Euro (EUR) to Slide on ECB Forward Guidance?

Despite holding steady against the US Dollar, the Euro has fallen against several of its peers this morning in advance of today’s potentially dovish ECB decision.

This will be the first meeting since the bank unveiled its new strategy a fortnight ago, targeting inflation at 2%. Although no new measures are expected for now, ECB President Christine Lagarde has signalled ‘interesting changes’ on the bank’s guidance, hinting at potential developments regarding the bank’s bond-buying scheme.

Lagarde’s proposed ‘changes’ have not inspired confidence, however, with dovish expectations capping EUR/USD under 1.18 as traders remain wary. Covid cases continue rising in the Eurozone and the most recent data suggests price rises are decelerating, with the headline Consumer Price Index dipping to 1.9% in June.

According to Reuters:

‘The European Central Bank is all but certain to promise an even longer period of stimulus on Thursday to make good on its commitment to boost inflation, but the debate among policymakers is likely to be tense and no new measures will be announced.’

Looking forwards then, the Euro is likely to be muted against USD this afternoon on the ECB’s decision. However, if the Eurozone PMI release prints as expected tomorrow, EUR may be able to recoup some gains as the service sector is forecast to demonstrate growth.

US Dollar (USD) Losing Ground – May Pick Up if Covid Fears Re-Emerge

The US Dollar has faced headwinds this morning as the Euro clings to yesterday’s gains in the EUR/USD exchange rate on the basis of a risk-on trading mood. US stock markets advanced for a second consecutive day, and investors are cheering company earnings as firms – including those in sectors related to the reopening – post upbeat forecasts.

So far, ongoing concerns seem unable to dent the cheerful market mood – this despite the fact that US coronavirus cases have nearly tripled since the trough in June. US Treasuries are sold off, pushing 10-year bond yields back toward 1.3% and dissuading USD investors.

The current EUR/USD exchange rate trend is likely to reverse, though, if global coronavirus cases come under close scrutiny. While current bullish sentiment allows investors to overlook the Covid situation temporarily, their attention will soon be called back to the pandemic, as world leaders stress the danger of ignoring the virus’s spread.

Germany’s Chancellor Angela Merkel remarked on Thursday that ‘the rise in coronavirus cases in Germany was worrying’, urging people to get vaccinated.

In addition to risk-off potential, US PMI figures could bolster the US Dollar against the Euro tomorrow, if the services sector expands as anticipated and manufacturing resists too big of a drop. Later today, the US Department of Labor’s weekly Initial Jobless Claims data could be looked upon for fresh trading impetus.