18.07.201918:03 Forex Analysis & Reviews: EUR/USD: ECB rumors, Mnuchin's refutation, and Italy again

The euro/dollar pair cannot determine the vector of its movement. The weakness of the European currency pulls the price down to the borders of the 11th figure, but the uncertainty of traders in the development of further dollar rally does not allow the EUR/USD bears to identify new price horizons.

In general, the fundamental picture is not in favor of the euro, especially in light of the rumors published today about the possible actions of the ECB. At the same time, the dollar also cannot gain universal support against the background of incomprehensible prospects for US-China relations, as well as against the background of possible actions of the White House regarding the overvalued greenback. In the end, the pair is forced to trade in a flat, although the general trend is directed toward reducing the price of EUR/USD. However, to consolidate the pair within the 11th figure, bears need a strong information occasion. At the moment, the fundamental background of the pair is very controversial.

Let's start with the problems of the single currency. Actually, traders have not learned anything new today – the information published by Bloomberg once again reminded investors that they need to prepare for the easing of monetary policy on the part of the ECB. According to insider information, the members of the European regulator are ready at the July meeting to update the ECB's mandate on inflation. According to rumors, the Central Bank will revise (reduce) the target inflation level, which is now "slightly below" two percent in the medium term. The euro/dollar pair, which this morning rose almost to the middle of the 12th figure, reacted instantly, falling by 45 points. After all, the information that the ECB can revise its inflation target is a warning signal for traders. Such a step will create conditions for a long period (longer than the market assumes) of application of incentive programs. Although this is just a rumor, traders "believed" them, hurrying to get rid of the euro.

However, not only macroeconomics puts pressure on the single currency. Today, Italy reminded of itself again, where political passions have been boiling for several weeks. And if earlier, the foreign exchange market ignored these events (reasonably considering it a local conflict), today's statement by Deputy Prime Minister Luigi Di Maio (leader of the "5-star movement") sent a signal to a possible political crisis in the country. He accused his coalition partners – the League party – of provoking the collapse of the coalition government. In turn, the leader of the "League" Matteo Salvini allowed the possibility of early elections, putting forward similar accusations towards his colleagues. The fact is that the two leading parties of Italy have faced serious disagreements regarding the election of German Ursula von der Leyen to the post of head of the European Commission. According to preliminary agreements, representatives of both parties had to vote for her candidacy in the European Parliament. However, members of the "League" in the end, voted against it. With a minimum margin (only 9 votes) Leyen took her post, but this situation has exacerbated the conflict between the members of the Italian coalition.

Traders fear that if it really comes to early elections, the wave of anti-European sentiment in Italy will come to power more radical eurosceptics, which will only strengthen the political conflict between Rome and Brussels. Although the likelihood of the "Italexit" is small enough, the next political confrontation may have a negative impact on the dynamics of growth of the European economy, which is experiencing not the best times.

All of the above fundamental factors quite reasonably pull EUR/USD down to the borders of the 11th figure. But as soon as today, the pair approached the level of 1.1205, the southern momentum faded and the price actually returned to the opening level. This happened for several reasons. First, the dollar reacted strongly to the comments of the Minister of Finance of the USA Steven Mnuchin, which denied the rumors about the intentions of the White House to devalue the dollar. Perhaps the dollar bulls were confused by the very wording of this refutation. Mnuchin said that "at the moment" there is no change in the policy of a strong dollar, although this issue may be considered in the future. In other words, although the Minister denied such intentions in the short term, he did not rule them out in the future. Such rhetoric remains uncertain about the dollar's prospects, especially if the Fed at its July meeting takes a less "dovish" position than the market expects.

In addition, yesterday in the United States, quite disappointing macroeconomic data were published. The number of issued permits for housing construction decreased by 6% in June-this is the worst result in the last two years. This indicator is an important leading indicator of the health of the real estate market (and the economy as a whole), so such a weak dynamics suspended the growth of the dollar throughout the market.

Thus, both the dollar and the euro continue to be under pressure of their own fundamental problems. The single currency in this confrontation looks, of course, weaker – but due to the lack of powerful info drivers, EUR/USD bears cannot develop a full-scale downward movement to the main support level of 1.1100. Therefore, the pair will continue to hang out in the flat in the near future, trading in the range of 1.1160-1.1280 (the lower and middle lines of the Bollinger Bands indicator on D1, respectively).