• EUR/USD has been fluctuating in a very tight range above 1.0700.
  • ECB will announce policy decisions and releases updated economic projections.
  • ECB's rate hike guidance could trigger a significant reaction in the pair.

EUR/USD has been struggling to make a decisive move in either direction since the beginning of the week as market participants await the European Central Bank's (ECB) policy announcements. Depending on the ECB's tone, the pair could break out of the 1.0660-1.0760 range that it formed in June. 

The ECB is widely expected to leave its key rates unchanged and conclude its Asset Purchase Programme. Several ECB policymakers argued that they might need to consider a 50 basis points (bps) rate hike in July to tame inflation. On the other hand, some members of the ECB's Governing Council grow increasingly concerned about the potential negative impact of an aggressive policy tightening on the economic activity, which has been showing signs of weakness lately.

In case the policy statement shows that the majority of policymakers lean toward a 50 bps rate hike in July, this could be seen as a bullish development and provide a boost to the euro. On the flip side, a cautious rate hike outlook with the bank not entertaining the idea of double dose increases could cause the shared currency to suffer heavy losses against the dollar.

The ECB will also release the updated macroeconomic projections. If the bank sees a significant risk to growth in the remainder of the year, the euro is likely to lose interest. A softer inflation forecast, however, should help EUR/USD gain traction.

ECB Preview: Laying groundwork for rate hikes but EUR/USD could still fall.

In the second half of the day, the US Department of Labor will release the weekly Initial Jobless Claims data but investors are likely to stay focused on ECB President Christine Lagarde's press conference. 

EUR/USD Technical Analysis

1.0680 (100-period SMA on the four-hour chart) aligns as interim support for EUR/USD ahead of 1.0660 (static level). In case the latter support fails on a dovish ECB tone, this could be seen as a bearish development and attract sellers. In that scenario, additional losses toward 1.0620 (Fibonacci 38.2% retracement of the latest uptrend) and 1.0600 (psychological level, 200-period SMA) could be witnessed.

On the upside, a four-hour close above 1.0760 (static level) on a hawkish ECB policy outlook could open the door for an extended rally toward 1.0780 (the end-point of the latest uptrend) and 1.0800 (psychological level).

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