Forex overview. EUR/USD: Still No Guidance by the ECB, but Watch for Forex Comments – ForexNews.PRO
A US-EU trade agreement appears to be on the horizon, likely modeled after the 15% tariff structure established in the recent US-Japan deal. Meanwhile, the European Central Bank (ECB) is expected to tread cautiously, refrain from introducing fresh guidance, and potentially address the euro’s strength—likely interpreted as a dovish signal. We believe EUR/USD may have reached its recent peak and foresee a correction in the short term. Similarly, the Japanese yen’s rally seems to have extended beyond sustainable levels.
USD: Showing Signs of Undervaluation
Despite escalating trade tensions earlier this month, the US dollar held steady during the first half of July. Likewise, any near-term optimism surrounding a breakthrough US-EU trade deal—as suggested by yesterday’s US-Japan agreement—appears unlikely to meaningfully sway the greenback.
Should the USD stage a recovery as anticipated, such a move would necessitate strong economic data rather than trade-related developments. Recently, broader sensitivity in USD crosses to short-term rate differentials reinforces this pattern. However, this week’s limited economic activity has allowed some buildup of speculative short positions against the dollar.
Today’s data-heavy calendar introduces potential catalysts, including reports on new home sales (following soft existing home sales figures), S&P Global PMIs, and jobless claims. Jobless claims data, showing a five-week decline and stabilized continuing claims since mid-June, will draw particular attention given the proximity of next week’s US jobs report. A robust release could further stoke Nonfarm Payroll expectations, currently anticipated at 110k. Markets are pricing in 16bp of rate cuts for September—a scenario that carries opportunities for hawkish repricing, which might support a dollar rebound.
EUR: Focus on ECB’s Position on the Euro
The ECB is set to announce its latest monetary policy decisions today, with no changes in rates anticipated. Market speculation surrounding an imminent US-EU trade agreement—potentially based on yesterday’s Japanese tariff blueprint—raises questions about its implications on the ECB’s outlook regarding trade and currency strength.
If the ECB anticipates progress on a trade deal, dovish surprises could be avoided. Nevertheless, discussions around the euro’s recent appreciation may introduce new risks. Some ECB members have openly expressed concerns about the strong euro exacerbating inflation undershooting, potentially exposing these themes in today’s commentary. Whether the ECB avoids such remarks to preserve US-EU trade dynamics amid Trump’s aversion to perceived currency manipulation remains uncertain.
In terms of forward guidance, expectations remain muted. Policymakers have consistently described monetary policy as well-positioned amidst subdued inflationary pressures, with markets merely pricing in one cut by year-end. Consequently, today’s meeting should carry limited market impact unless currency discussions surface unexpectedly.
While modest downside risks linger for the euro heading into the announcement, a neutral ECB stance avoiding currency criticism and retaining unchanged guidance could push EUR/USD above 1.180. Earlier PMI releases are unlikely to significantly sway sentiment.
JPY: Running Out of Momentum
The Japanese yen continues its strong performance, maintaining its position as the top-performing G10 currency this week with a 1.8% gain against the dollar. Momentum from the US-Japan trade agreement has reinforced market expectations of upward adjustments to Bank of Japan (BoJ) rates by year-end, with 20bp now priced in—up from 16bp earlier this week and just 10bp last month.
Despite our generally hawkish BoJ outlook, political uncertainty surrounding Japan’s leadership transition adds potential drag to interest rate increases. A new prime minister might favor a more cautious stance on monetary tightening.
Recent yen gains may have exhausted their short-term potential following post-election risk adjustments and optimism surrounding the trade deal. As political turbulence looms, coupled with unresolved debt issues, market participants might rebuild USD/JPY long positions near current levels. A return toward 148.0 appears feasible over the coming days.
