The euro suddenly strengthened throughout the market on the eve of the September meeting of the European Central Bank. The euro's strongest growth dynamics was observed in cross pairs (for example, EUR/GBP), while the euro was only able to return to the area of the 18th figure against the dollar. Nevertheless, EUR/USD bears failed to overcome the support level of 1.1740 (the lower line of the Bollinger Bands indicator on the daily chart) once again - as soon as the pair fell to this price barrier, it turned 180 degrees, returning to previous positions in just a few minutes.
What happened?
On the eve of important events, as a rule, the market is flooded with all kinds of rumors - and not all of them are subsequently confirmed. Nevertheless, insiders are taken very seriously, especially if the information disseminated is fundamentally different from the generally accepted forecast scenario. Today we saw a classic example of a similar situation: according to the general opinion of the majority of experts, the ECB members will voice pessimistic assessments regarding the prospects for the European economy, in particular adjusting their inflation forecasts downward. In addition, many analysts warn that ECB President Christine Lagarde may voice her concerns about the euro's growth, given the slowdown in inflationary growth in August. At the same time, the ECB will most likely declare its readiness to extend the stimulus program by expanding its scope.
In other words, the overwhelming number of experts are confident that the ECB will negatively assess the latest trends in the eurozone, noting a significant slowdown in the recovery process. Actually, there are no obvious reasons for optimism: the consumer price index collapsed into negative territory in monthly terms (deflation was recorded for the first time in four years), unemployment is growing, and industrial production indicators remain at low values. The service sector leaves much to be desired, with the corresponding PMIs declining in all key European countries. Coronavirus outbreaks (France, Spain) also do not contribute to any optimism.
The previous comments from the ECB representatives have also been very cautious. For example, ECB Chief Economist Philip Lane criticized the euro's high rate, which, in his opinion, serves as an "anchor" for inflationary growth. Another ECB spokesman, Pablo Hernandez de Cos, recently admitted that the economic recovery "is likely to be incomplete and uneven." At the same time, he admitted that Spanish companies with liquidity shortage due to the coronavirus crisis may face solvency problems. His colleague, Luis de Guindos, was also pessimistic about the prospects for economic recovery in the eurozone this year. In his opinion, key macroeconomic indicators (primarily inflation) will fall by the end of this year, and we will only see the recovery process in 2021.
Considering such news flow, the market was set up accordingly - the euro fell in price everywhere, and it dropped near a monthly low of 1.1753 against the dollar. But on Wednesday afternoon, influential news agency Bloomberg published the news that ECB members will express confidence that the European economy will show strong growth in the near future, in connection with which the forecast values will be increased. According to unnamed sources, "the updated forecasts of the ECB will reflect the growing confidence of a number of representatives of the central bank in the prospects for the economy."
The euro surged all over the market, and returned to the area of the 18th figure against the dollar.
In my opinion, such insider information can provide EUR/USD traders with a disservice - both literally and figuratively. The fact is that the market is now determined to hear more optimistic estimates from the ECB, having laid such a scenario in prices. And if de facto forecasts remain the same or even be reduced (which is quite likely), the euro will significantly weaken. In other words, prior to the publication of the high-profile information from Bloomberg, the market seemed to win back the predicted pessimism of the ECB. Now the situation has changed. To be more precise, market expectations have changed, which may well not be justified.
How to trade?
Buyers of EUR/USD can fall into a trap they have set up for themselves. Now bulls have become hostages of inflated expectations. And if the ECB does not meet their expectations, the euro will significantly weaken, even against the dollar. Therefore, it is better to take a wait-and-see attitude at the moment, until the results of the September meeting have been announced, or rather, before the end of Christine Lagarde's press conference.