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EUR/USD and GBP/USD: ECB to announce new program in monetary policy on July 22

The European currency sank slightly against the US dollar at trading on Monday, July 12, after the statements of the president of the European Central Bank. During her speech, Christine Lagarde told investors to prepare for the new guidance on monetary stimulus, which will be announced in 10 days. Such news, as a rule, supports risky assets, but there are several nuances that make traders take a wait-and-see position.

In her speech, Lagarde said that despite the upcoming changes in the asset purchase program, new measures may be taken next year to support the eurozone economy. After the end of the emergency bond-buying program, it is likely that the European Central Bank will offer some longer-term instrument to stimulate and support the economy, which distances investors from a relatively early increase in interest rates. It is clear that until the full completion of such programs, there can be no question of any manipulations with interest rates.

Let me remind you that last week, the ECB raised its inflation target to 2% and admitted that it allows exceeding the target for some time. Lagarde noted that at the meeting of the ECB's Governing Council, which will be held on July 22, changes will be adopted and forecasts for monetary policy will be revised. It was not said what specific changes were discussed, but it is already clear that this will be an important meeting. Up to this point, it was best to bet on the strengthening of the European currency, since investors expect quite aggressive statements from Lagarde, which may not coincide with what the ECB head will actually tell us. "Given the persistence that we need to demonstrate to meet our commitments, further forecasts for monetary policy will certainly be revised," Lagarde said.

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Lagarde also said that the ECB's current plan to buy 1.85 trillion euros ($2.2 trillion) of bonds will be in effect "at least" until March 2022. This may be followed by a "transition to a new format", which will last for a longer period. She did not go into the details of this plan. Lagarde declined to discuss the moment when emergency bond purchases will begin to decline, saying that she is cautiously optimistic about the recovery of the economy, but the risk is a new Indian strain of coronavirus, which could harm the conditions for returning to normal life. "We need to be very flexible and not be in the clouds, expecting that the economy will return to its growth rate in the next few weeks or months," Lagarde said.

A similar opinion is shared by her colleague from the Board of governors, Francois Villeroy de Galhau. The head of the Bank of France made similar statements, noting that the tactics can be changed at any meeting on monetary policy. "We will have at least four such meetings before the end of the year," Galhau said.

One thing is clear — at the next meeting, the ECB will at least have to change the wording of its policy on interest rates in order to explain to the market its new inflation targets.

As for the technical picture of the EUR/USD pair, so far there is little that can harm the upward trend of the European currency. The only point in determining the further direction may be the level of 1.1860 and the inability of buyers of risky assets to return it. If the bulls are unable to offer anything around this range, then the pressure on the euro may increase, which will push the pair to a minimum of 1.1825, and then to larger support at the base of the 18th figure. If the bulls manage to break above 1.1860, then a second jump of the trading instrument to the highs of 1.1895 and 1.1930 is not excluded.

As for today's fundamental statistics, the report from Destatis on wholesale prices in Germany could not support the euro. According to the data presented, prices grew at the fastest pace since 1981. Wholesale prices rose 10.7% year-on-year in June after rising 9.7% in May. The annual increase was the largest since October 1981, when prices rose by 11% in the context of the oil crisis. On a monthly basis, the growth of wholesale prices decreased to 1.5% in June from 1.7% in May. The growth was mainly due to an increase in wholesale prices for petroleum products by 37.7% over the year.

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At the end of the review, I would like to draw attention to the statements of US Treasury Secretary Janet Yellen, who, speaking in Brussels, took a step to restore US relations with the European Union, calling on the members of the bloc to help resist China and Russia. During her first visit as head of the Treasury to the European capital, Yellen recalled the partnership and the "rules-based international order" created after the Second World War. In her opinion, now China and Russia are threatening this order. "Together, we must counter threats with the principles of openness, fair competition, and transparency," Yellen said during her speech. She again recalled China's economic practice of manipulating the yuan exchange rate and trade duties, recalled the violation of human rights, and also noted the growing threat from Russia.

These statements further underscore President Joe Biden's desire to forge the ties that were severely undermined under past President Donald Trump. Let me remind you that Trump aggressively opposed China, imposing duties and engaging in protectionism, and also seriously worsened trade relations with the EU. The US is now calling for closer cooperation with the EU on economic, tax, and climate issues.

GBP/USD

The British pound, like the European currency, sank today in the first half of the day, but then managed to recover its position. The key task for buyers now is to return to the control of the 1.3870 level, consolidation at which will push speculative traders to new purchases in the area of the 39th figure base, and then even higher - to the 1.3940 high. If the pressure on the pound returns in the afternoon, most likely, the bears will try to reach the 1.3825 low, the break of which will quickly push the pound to the 38th figure area, and then to the larger low at 1.3755.

The material has been provided by InstaForex Company - www.instaforex.com