EUR/USD Ends Week Lower, All Eyes on Fed

  • EUR/USD is trading at 1.1764 on Friday, July 23, losing 0.17% for the week and is likely to conclude the second consecutive bearish week.

  • The ECB revealed its more dovish tone on Thursday, putting additional pressure on the euro.

  • Markets are waiting for the Fed’s monetary policy update scheduled for July 28.

EUR/USD is set to end this week slightly lower, which will leave the pair fewer chances to end July in green. This is the second consecutive bearish week for the European currency, as the dollar has benefited from safe-haven seekers amid the surge of COVID-19 cases caused by the Delta variant, including in Europe.

Meanwhile, the European Central Bank’s (ECB) more dovish stance revealed on Thursday put additional pressure on the euro, which dropped 0.17% against the greenback in a volatile session. Now it’s the turn of the Federal Reserve on July 28 to present its monetary policy update, which will be another turning point for the pair and will probably define the trend for the coming weeks.

The USD index, which tracks the American currency against six other currencies, has secured a slight gain of 0.2% for the week ending July 23, to fluctuate near 92.891. The index peaked on Wednesday at 93.194, driven by positive corporate earnings that boosted investors’ confidence.

ING strategists Chris Turner, Petr Krpata, and Francesco Pesole, said in a note to investors seen by Reuters:

“The heavily European-weighted dollar index remains pretty close to its recent highs at 93.00, which is a good performance given the bearish re-assessment of US and global growth prospects that have taken place over the last month.”

Fundamentals that Moved EUR/USD in the Week Between 19 and 23 July

Since the start of the week, the pair has moved horizontally, trying to consolidate above 1.1800 on several occasions, though that proved to be a strong resistance level. The pair gave up on Thursday when the ECB changed its guidance to adopt more dovish rhetoric. Following a volatile session, EUR/USD fell below 1.1760. Here are the main events that moved the paid:

ECB Updates Its Guidance (Influence – ***)

As we explained in a previous article, the ECB shared its monetary policy statement on July 22, keeping its interest rate unchanged at 0.00% and reiterating the commitment to buy bonds worth $1.850 trillion under the Pandemic Emergency Purchase Program (PEPP), all in line with economists’ expectations. However, investors focused on the bank’s change in guidance following its new strategy.

Earlier this month, the central bank updated the monetary policy strategy, which is the first strategy review since 2003. The new strategy adopts a symmetric 2% inflation target over the medium term, which is a bit higher than the previous target of keeping inflation close to 2% but just below it.

Considering the new strategy, the ECB revised its guidance on interest rates changes during the last meeting, telling investors that it would continue to stimulate the economy until reaching the inflation target. In other words, the central bank will keep rates at record low levels for longer than expected. The dovish stance was not supported by all members of the ECB’s Governing Council, but the majority voted for it.

The ECB’s tone of continuous support put pressure on the European currency, which fell over 0.16% on Thursday.

ING noted:

“The ECB did indeed make a shift towards more dovishness, putting more emphasis on the possibility of inflation overshooting and by tying the forward guidance on interest rates even closer to the inflation projections. With an inflation projection currently of 1.4% YoY for 2023 and the new forward guidance, interest rates will remain low for even longer.”

Meanwhile, the ECB observes a rapid growth of the economy, but the Delta variant poses a serious risk.

US Jobless Claims Surprisingly Raise to 2-Month High (**)

The strengthening of the US dollar was capped by the disappointing US jobless claims data, which is updated on a weekly basis. On Thursday, the Labor Department said that the number of US citizens applying for unemployment benefits increased to a two-month high in the week ending July 17. Still, the report showed that more people are returning to work.

Jobless claims rose 51,000 to 419,000, while economists expected a decline to 350,000. Data for the previous week was revised upward to reflect 8,000 additional applications.

Christopher Rupkey, chief economist at FWDBONDS in New York, told Reuters:

“The rise in jobless claims this week tells us that the labor market’s troubles are not completely behind us and the Delta variant may yet throw a monkey wrench into the economic recovery from the shortest recession in American history.”

The Delta variant hasn’t hit the US similarly to many Asian countries, but a new wave of infections might be on the horizon, although economists do not anticipate large-scale lockdowns.

The four-week average of claims, which is regarded as a better gauge of labor market trends as it smooths out volatility, rose only 750 to 385,250.

EU’s Preliminary Business Activity Data Points to Accelerated Expansion (**)

Business activity in the eurozone has expanded at the fastest pace in over 20 years in July, as more restrictions are lifted amid vaccination, although concerns over the Delta variant hit business confidence.

IHS Markit’s preliminary composite purchasing managers’ index (PMI) rose to 60.6 in July from 59.5 in June, the highest since July 2000, beating estimates of 60.0.
Chris Williamson, chief business economist at IHS Markit, said:

“The euro zone is enjoying a summer growth spurt as the loosening of virus-fighting restrictions in July has propelled growth to the fastest for 21 years. The services sector in particular is enjoying the freedom of loosened COVID-19 containment measures and improved vaccination rates, especially in relation to hospitality, travel and tourism.”

The services PMI surged to 60.4 from 58.3, the highest reading since June 2006 and better than analysts’ expectations at 59.5. Elsewhere, manufacturing PMI declined from June’s record high of 63.4 to 62.6.

The upbeat PMI data couldn’t provide much support to the euro, as it fell against the USD after the report was released.

Germany’s Recovery Accelerates, French Business Activity Loses Steam (**)

The German economy has accelerated its strong recovery in July. IHS Markit preliminary data released on Friday showed that the composite PMI rose to the highest level in about 25 years, causing inflationary bottlenecks. The surge in PMI was driven by strong demand amid the easing of restrictive measures. The index increased to 62.5 from 60.1 in June. Both services and manufacturing PMI indexes have accelerated.

However, the second-largest economy of the eurozone shows a different picture. French business activity has weakened more than expected in July, declining to a three-month low. Shortages of materials and transportation delays negatively impacted companies, IHS Markit said The flash composite PMI dropped to 56.8 from 57.4 in June, while analysts anticipated an increase to 58.5.

Disappointing data from France has probably put additional pressure on the euro, as investors ignored the upbeat PMI readings coming from the eurozone, especially when business confidence dropped due to the Delta variant.

US Housing Starts Beat Expectations, but Building Permits Decline (**)

Earlier this week, US housing market data sent mixed signals on Tuesday, as homebuilding accelerated more than expected last month, but permits for future home construction dropped more than anticipated to an eight-month low. The decline was likely caused by expensive building materials along with shortages of labor and land.

Meanwhile, the US Commerce Department said that high prices for homes could persist amid low mortgage rates and demand for more spacious houses amid the pandemic.

Housing starts increased by 6.3% to a seasonally adjusted annual rate of 1.643 million units in June. Data for May was revised down to 1.546 million units from 1.572 million units reported initially. Analysts surveyed by Reuters expected housing starts to increase at a rate of 1.590 million units in June. Homebuilding accelerated in the West and the populous South but slowed down in the Northeast and Midwest. Starts rose 29.1% compared to June 2020.

Meanwhile, building permits fell 5.1% to a rate of 1.598 million units in June, the lowest since October 2020.

EUR/USD Outlook

The US dollar is relatively close to updating the highest level year-to-date (YTD) against the euro, with the EUR/USD pair keeping the bearish tone since the end of March, when it traded above 1.2250. The pair is currently trading at 1.1761, not far away from 1.1703 touched in March, which remains the lowest level since November 2020.

The greenback has experienced two consecutive bullish weeks and is likely to end July in the positive territory. However, the most plausible scenario for the final week of the month is that the pair will fluctuate within a horizontal channel until the Fed’s meeting scheduled for July 28, which might give an additional impulse to the US dollar.

Analysts continue to be bullish on the USD at the end of the year, expecting the EUR/USD pair to decline to 1.1500 by the end of 2021.

Westpac analysts said in a note that “the US is better positioned than others to withstand the spread of the delta variant thanks to its earlier strong vaccination drive.”

All in all, the Fed will set the tone next week, and we’ll keep you updated on that.

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