23.07.202619:31 Forex Analysis & Reviews: EUR/USD. ECB Leaves Policy Unchanged as the Dollar Strengthens

Following today's meeting, the European Central Bank left all monetary policy parameters unchanged, delivering the base-case scenario that markets had widely anticipated. However, the ECB's messaging was far from dovish: the regulator did not rule out further policy tightening and acknowledged that renewed energy price increases are intensifying inflation risks.

Nevertheless, EUR/USD came under considerable pressure, falling toward the 1.1300 level and testing the 1.1370 support level, which corresponds to the lower boundary of the Bollinger Bands indicator on the daily timeframe (D1).

It should be noted that this price movement was driven not only by renewed strength in the US dollar (although the greenback was the primary driver of the decline), but also by weakness in the euro, which failed to receive the expected support from the ECB.

Why the ECB Failed to Support the Euro

First, the Governing Council effectively adopted a wait-and-see approach. In its accompanying statement, the ECB noted that the full impact of the energy shock on inflation has not yet materialized and that uncertainty remains "extremely high."

At the same time, ECB President Christine Lagarde did not meet the expectations of the more hawkish segment of the market, refraining from providing any direct signals about a possible rate hike in September. While she did not rule out further policy tightening, she repeatedly emphasized that future decisions would be made "exclusively on the basis of incoming macroeconomic data."

This standard and familiar wording proved significantly softer than some market participants had expected, as they were looking for a clearer signal of a more decisive policy shift.

Second, the ECB acknowledged not only rising inflation risks but also highlighted the continued weakness of the eurozone economy. This suggests that the central bank remains caught between two conflicting forces: on one hand, higher oil prices and the risk of accelerating CPI inflation; on the other hand, weak economic growth, which significantly limits the scope for further monetary tightening.

Third, elevated market expectations worked against EUR/USD buyers. In early July, after the latest escalation in the Middle East, many investors began pricing in a more aggressive ECB policy scenario. However, today's meeting was not sufficiently hawkish to justify those expectations.

At the same time, markets reacted to the ECB decision by selling the euro, as earlier hawkish expectations had already been reflected in prices. Hawkish expectations had already been reflected in market prices, while the actual ECB meeting failed to provide new arguments for further euro purchases.

All of these factors weighed on the euro. On the one hand, higher oil prices increase the risk of prolonged stagflation. On the other hand, the market remains uncertain about whether the ECB is prepared to begin another phase of monetary tightening as early as autumn.

Investors were clearly looking for stronger signals regarding a possible September rate hike, but instead the ECB emphasized its dependence on incoming economic data while also highlighting elevated uncertainty. Market expectations were too high, and this was likely the main factor behind the euro's weakness following the July ECB meeting.

Dollar Regains Support from Rising Risk Aversion

Nevertheless, as noted above, the main driver of today's EUR/USD decline was not the euro itself, but the US dollar, which once again benefited from stronger risk-averse sentiment.

The sharp rise in oil prices significantly altered inflation expectations, bringing the interest rate factor back in favor of the dollar. During the second half of the day, Brent crude surged toward $100 per barrel amid escalating tensions in the Middle East, Houthi missile attacks on Saudi oil tankers, and continued risks surrounding the Strait of Hormuz.

Market participants began pricing in the possibility of more persistent inflation in the United States, which could force the Federal Reserve to keep interest rates elevated for longer and potentially consider another rate hike in the autumn or December.

Donald Trump also contributed to the shift in sentiment by stating today that he is close to making a decision on whether to resume military operations against Iran. In an interview with Axios, the US president said that potential new strikes against Iranian targets could be even larger than those carried out during Operation Epic Fury.

Regarding the possibility of a diplomatic resolution, Trump said that Iran "wants to negotiate," but added that the country is not yet ready to reach an agreement.

Outlook

Therefore, the July ECB meeting did not provide support for the euro, while renewed risk aversion allowed the greenback to strengthen across financial markets.

The combination of these factors enabled EUR/USD sellers to test the 1.1370 support level (the lower boundary of the daily Bollinger Bands indicator). However, bears failed to secure a break below this level, indicating that traders remain cautious.

Therefore, short positions should only be considered if sellers manage to break decisively below this support zone. If the level holds, the pair will most likely return toward the 1.1400 level, specifically the 1.1410-1.1470 level.