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The upcoming week promises to be quite active and volatile for EUR/USD. Market participants will need to balance three fundamental factors: geopolitical developments, decisions from the European Central Bank, and important macroeconomic data. These "core" themes will set the tone for trading in the EUR/USD pair.
Geopolitics continues to play in favor of the dollar amid rising risk-averse sentiment. It seems that this fundamental factor will come to the forefront for EUR/USD traders in the coming days.
In the last two days, the situation surrounding the U.S.-Iran conflict has escalated sharply, effectively returning to a phase of full-scale (not localized) confrontation. The catalyst for this new wave of escalation was the death of two American servicemen in Jordan due to Iranian missile and drone strikes. In response, the United States has conducted massive airstrikes for the eighth night, targeting military infrastructure, bridges, tunnels, and other facilities in Iran.
Tehran, in turn, has officially announced the suspension of its commitments under a peaceful memorandum of understanding, after which Iranian forces attacked U.S. military facilities in the region. Air raid sirens were also heard in Bahrain, while a desalination plant in Kuwait came under fire from Iranian missiles.
At the same time, both sides continue to exchange harsh statements, virtually ruling out a swift return to diplomatic resolution.
However, geopolitics is unlikely to drive a sustainable (this is the key word) decline in the EUR/USD pair. Judging by the market's reaction, traders still see the current escalation as part of a "strong bargaining" strategy: both sides are trying to strengthen their negotiating positions through a limited show of force while keeping the option of returning to indirect negotiations open. Certainly, such a scenario remains quite vulnerable amid the ongoing expansion of the conflict. But as long as the market does not see signs of uncontrolled escalation, EUR/USD retains the possibility of remaining within the bounds of the 14-figure.
Moreover, if signals about the resumption of mediation contacts emerge next week, risk-averse sentiment will significantly (and quite sharply) weaken, allowing buyers to once again test the resistance level of 1.1470 (the upper line of the Bollinger Bands, coinciding with the Kijun-sen line on the D1). Given Donald Trump's history of sharp reversals in similar situations, this outcome cannot be ruled out.
On Thursday, July 23, the ECB will hold another meeting, which may trigger increased volatility in the EUR/USD pair. It can be confidently assumed that the central bank will keep all three key interest rates unchanged, implementing the basic and most expected scenario. Therefore, all market attention will be focused on the accompanying statement's rhetoric and comments from Christine Lagarde.
On the one hand, several factors support maintaining the status quo. Inflation in the Eurozone continues to gradually slow, core price pressures remain relatively stable, and economic growth still appears quite weak. Additionally, the ECB typically does not react to short-term price spikes in commodity markets (as we are currently observing), preferring to assess the likelihood of so-called secondary inflation effects.
On the other hand, recent events in the Middle East have significantly complicated the situation. A new escalation of the U.S.-Iran conflict has led to a sharp rise in oil prices, further heightening the risk of accelerating inflation in the Eurozone. Therefore, it is likely that the ECB will acknowledge the increased uncertainty and note that it will closely monitor the impact of the energy shock on inflation expectations and wage dynamics in the near future.
All of this suggests that the most likely scenario for the July meeting is a "hawkish pause." In other words, the ECB will keep interest rates unchanged, but Lagarde will likely express a relatively tough stance and will not signal the market about a probable end to the tightening cycle. In this context, the head of the central bank will certainly state that further decisions will depend entirely on incoming macroeconomic data and developments in the geopolitical situation.
In other words, the outcomes of the July ECB meeting may provide support to the euro; however, the potential for growth in the single currency may be limited if demand for the dollar as a safe-haven asset persists in the market. In such a case, buyers of EUR/USD are unlikely to overcome the aforementioned resistance level of 1.1470.
Among the macroeconomic releases for the upcoming week, the most significant for EUR/USD will be the PMI indices (July 24) and the ZEW report (July 21), which will allow for an assessment of the current state of the eurozone economy and the sentiment of businesses and investors.
The ZEW Economic Expectations Index unexpectedly rose to 10.5 points in June (after a sharp decline to -10.5 points), returning to positive territory for the first time since February of this year. This result suggests that investors are beginning to factor in a gradual recovery of the German economy amid expectations of fiscal stimulus and reduced political uncertainty. However, the July report will be released in a more challenging external environment. On one hand, the launch of government investment programs in Germany may support these expectations. On the other hand, weak production dynamics, high energy costs, and a new wave of uncertainty due to the Middle Eastern conflict could weigh on them.
Nevertheless, most analysts believe that investors will maintain an optimistic outlook in July: the business sentiment index in Germany is expected to rise again—this time to 18 points.
As for the PMI, the focus will primarily be on the German and Eurozone indicators. The manufacturing activity index in Germany is expected to remain in expansion territory, rising to 50.6 (from 50.3). The German services PMI is also expected to increase to 49.0 (after a rise to 48.6 in June). If, contrary to forecasts, this figure enters the expansion territory, it will provide significant support for the euro. A similar dynamic is expected for the Eurozone PMI indices: a rise in the manufacturing sector is anticipated to 51.6, while the services sector is projected to reach 49.8.
From a technical standpoint, the EUR/USD pair on the four-hour chart is positioned between the middle and lower lines of the Bollinger Bands, above the Kumo cloud, and between the Tenkan-sen and Kijun-sen lines. On the daily chart, the pair is situated between the middle and upper lines of the Bollinger Bands, below the Kumo cloud and between the Tenkan-sen and Kijun-sen lines. All of this indicates ongoing uncertainty: short-term indicators are not forming clear signals, and higher timeframes do not indicate an advantage for either side. In such conditions, the pair is likely to continue consolidating in the range of 1.1380 – 1.1470 in anticipation of new fundamental impulses.
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