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EUR/USD: rumors ruling market. Traders on edge ahead of Fed's policy meeting

EUR/USD is still trading sideways between 1.1750 and 1.1830 that represent the lower border of Bollinger Bands on a daily chart and the upper border on Bollinger bands on the same timeframe. Traders are cautious in anticipation of the Fed's policy meeting in July. Its outcome will be available this Wednesday. This time, experts don't foresee any particular moves from the US central bank. It is the rhetoric which could trigger higher volatility among dollar-related currency pairs, including EUR/USD. Will this high volatility benefit the US dollar? The question is still open. Therefore, market participants are in no hurry to open large bets on EUR/USD, holding the pair inside the trading range.

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Currently, macroeconomic reports are of little importance for market sentiment. For example, today traders got to know the IFO survey for Germany. Despite optimistic estimates, the business climate index turned out red, falling short of expectations. The business climate indicator by IFO declined to 100.9 in July whereas analysts had projected the score of 102 points. Previously, the index had been printing higher readings over the last three months. Besides, the economic expectations index also went down in July. All in all, nothing extraordinary has happened as all indicators still revealed strong readings, even though they retreated off historic highs. Nevertheless, the fact that all indicators worsened did not allow the euro to assert strength. At present, the single European currency depends entirely on the US dollar which, in turn, is vulnerable to various rumors.

It is common knowledge that all policymakers of the US Federal Reserve are obliged to keep silence and avoid public comments 10 days before a policy meeting. That's why traders are making their own conclusions alongside currency experts and insiders. In fact, traders are baffled by the stream of abundant mixed information. No wonder, they are unable to determine a trajectory for EUR/USD.

Today analysts at Goldman Sachs stated that the upcoming policy meeting would be a routine gathering so that traders will find out any hints on earlier-than-expected tapering of fiscal stimulus. From the viewpoint of Goldman Sachs analysts, the FOMC will unveil the first hawkish signals not until September. Besides, analysts reminded the market that the Federal Reserve pledged to warn about such steps in advance. The Fed's policymakers acted exactly this way 4 years ago when they informed the market about contraction of their balance sheet. According to Goldman Sachs, the Federal Reserve is likely to announce the first hints about scaling back QE program at the two meetings in the autumn (scheduled for September and November). Thus, the central bank is likely to announce its new forward guidance in December.

Other experts reckon that the Fed could send hawkish signals already at the nearest policy meeting in July. For example, analysts at Commerzbank think that the regulator will amend the wording in the policy statement, saying that it would not continue implementation of its asset-buying program for a lengthy period. Instead of this wording, the US Fed could use another phrase. The essence is that the regulator could continue implementation of its stimulus until it achieves notable progress. In other words, the regulator could outline some criteria, albeit vague, that will allow the central bank to move away from its ultra-loose monetary policy.

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On the one hand, this message could be hardly viewed as hawkish. Nevertheless, this stance could provide the US dollar with solid support, especially against the euro because the latter has been weighed down by the clearly dovish stance of the ECB. Let me remind you that the new ECB strategy tolerates inflation surpassing the target level on a temporary basis, thus the regulator can neglect such inflation spikes. Most experts agree that the new ECB strategy postpones the deadline for a possible rate hike to a greater extent. The consensus suggests that the ECB might increase the key interest rate not until 2024. Some experts make more cautious forecasts, predicting the first rate hike in the first half of 2025. When it comes to the QE agenda, the ECB has not dropped any hawkish hints yet.

Therefore, even slight hints from the Federal Reserve about earlier-than-expected tapering stimulus programs will enable EUR/USD bears to reinforce selling pressure. The difference between the Fed's and the ECB rhetoric is going to be striking. The fact will exert strong pressure on EUR/USD.

Amid the fundamental background, long positions on EUR/USD look risky. Correctional spikes come as a result of temporary weakness of the greenback but not reinforcement of the euro. It makes sense to use such price jumps to open short positions. It would be better to enter sell positions at the moment when price spikes are waning. The major downward target is still seen at support of 1.1750 that coincides with the lower border of Bollinger bands on a daily chart.

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