EUR/USD Forecast: Will Lagarde trigger next leg lower? Where things stand ahead of the ECB

Sell the rumor, buy the fact? Investors seem to have been putting their tin hats on, waiting for the European Central Bank to hit the euro with a dovish decision.

The common currency has been lagging behind its peers in recovering against the dollar. That implies a pessimistic tone from ECB President Christine Lagarde and colleagues is already in the price. Therefore, it would take a not-too-dark view to trigger a counter-move – a stronger euro. 

Is this indeed the case? It depends on what the bank does and most importantly what it says about the future. The ECB unveils its first decision after announcing a strategic review, in which it allowed inflation to hover around 2% rather than set that level as a ceiling for price rises. With headline inflation standing at 1.9% YoY in June, does the decision have any medium-term implications? 

The Frankfurt-based institution could extend its bond-buying scheme beyond March 2022 – but it could also wait for new inflation and growth forecasts coming out only in September. Perhaps the greatest source of uncertainty comes from Lagarde's promise to change communications. Previous press conferences left many listeners perplexed. Clear messages could have a more significant market impact. 

In the shorter term, the rapid spread of the Delta covid variant threatens to derail the old continent's recovery – especially in tourist-dependent countries – and that is one reason to expect a pessimistic, euro-negative tone from Lagarde. Conveying concerns could weigh on the common currency.

See:

• ECB Preview: Three reasons why Lagarde could hit the euro when it is down
• European Central Bank Preview:  Fresh forward guidance, old fear

Apart from the all-important ECB decision, EUR/USD heavily depends on the broader market mood, which is also related to virus concerns. After a damp mood on Monday – which sent stocks down and the safe-haven dollar up – shares bounced back and the dollar dropped.

However, volatility remains elevated and markets could have another mood swing. Covid cases are rising rapidly in the US as well, and any American slowdown means the entire world could suffer – a favorable scenario for the dollar. 

Investors will also be eyeing negotiations on a bipartisan infrastructure bill in Washington after an initial vote failed to muster a majority. Weekly jobless claims are also of interest. 

EUR/USD Technical Analysis

Euro/dollar has been setting lower lows and lower highs – a downtrend. It is still suffering from downside momentum on the four-hour chart and trades below the 50, 100 and 200 Simple Moving Averages. Moreover, the Relative Strength Index (RSI) is balanced, maintaining a significant distance from oversold conditions. Overall, there is room for falls.

Some support awaits at 1.1770, last week's low, followed by the fresh three-month trough of 1.1750. Further down, 1.1717 and 1.17 await EUR/USD.

Some resistance is at the daily high of 1.18, followed by 1.1820, 1.1850 and 1.1880 – all capped recovery attempts in recent days.