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Euro weakening provides breathing space for the ECB, but trade war clouds remain
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Hello everyone, today XM Forex will bring you "[XM official website]: The weakening of the euro provides breathing space for the ECB, but the trade war is still dark." Hope it will be helpful to you! The original content is as follows:
Euro/USD has recently fallen 1.5% since hitting its nearly four-year high above 1.18 in early July, and is currently stabilizing around 1.16.
Reuters columnist Mike Dolan pointed out that the weakening of the euro provided a buffer for policy operations for the European Central Bank (ECB), especially in the context of increasing uncertainty in U.S. tariff policy.
The market generally expects that the ECB will maintain the current 2% deposit interest rate at its July 24 meeting, partly due to the decline in the euro exchange rate that eased the pressure on import inflation. However, potential trade war risks, especially the U.S. threat of imposing up to 30% tariffs on European goods since August, remains the "elephant in the room" at the meeting, which may force the central bank to reassess policy stance in the future.
The strong performance of the euro this year was once welcomed by European Central Bank executives because it reflects the trend of investors moving from US assets to European markets and the potential improvement of the status of the "global euro". However, after the EUR/USD appreciated by 15%, policy makers began to worry about its negative impact on export xmspot.competitiveness.
European Central Bank Deputy Governor Louis de Kindos made it clear that the euro rose to above 1.20 would significantly xmspot.complicate the economic environment, while Latvian Central Bank Governor Martins Kazakhs warned that tariffs xmspot.combined with the appreciation of the exchange rate may hit export dynamics hard.
At the same time, strong performance of U.S. economic data has supported the dollar's stabilization, with the dollar index (DXY) rebounding driven by retail sales, employment data and 2.7% inflation, and the cautious statements of Fed officials on a rate cut in July further consolidated the dollar's strength. Although the euro zone's CPI reached 3.6% in June, it is mainly driven by food and energy prices.The moderate inflation provided a basis for the dovish stance, but also caused concerns about rising wages in hawks and fiscal stimulus pushing higher inflation.
Technical Analysis
On the hourly chart, the euro/dollar showed signs of consolidation, trading in the range of 1.1550-1.1720, forming short-term support around 1.16. The implicit volatility of the two-week term options shows that market concerns about the August 1 U.S. tariff deadline has intensified caution.
The current euro/dollar has not exceeded the short-term resistance level of 1.1720 (61.8% Fibonacci retracement level), and after the breakthrough, the target looks to the psychological threshold of 1.18 and 1.20; on the downward side, 1.1550 is the key support, and it may fall below 1.1450 or 1.14.
MACD shows that the short-term momentum has weakened, RSI is close to neutral, and the short-term direction is unclear.
On the daily chart, the euro/dollar is still in the upward channel, but it is close to the lower track, and the broader euro exchange rate index is at a 14-year high. However, if the trade war escalates or the US dollar strengthens, the downward pressure will increase, and the market expectation range is 1.1450-1.1850.
In the short term, the euro/dollar trend will be driven by this week's ECB meeting and July PMI data. If the PMI shows that inventory is exhausted, it may imply that economic recovery supports the euro; Germany's Ifo index may be boosted by infrastructure investment. European Central Bank President Lagarde expects to maintain the status quo and avoid making clear statements to retain flexibility.
Founding from the depth, the European Central Bank is facing a xmspot.complex "coward game": the weakening of the euro eases inflationary pressure and provides room for easing; but the trade war and the potential appreciation of the euro may force a restart of interest rate cuts in September.
Deutsche Bank pointed out that the central bank needs to distinguish between "external shocks" (tariffs, US dollar fluctuations) and "internal drives" (economic improvement under fiscal stimulus). Germany's large-scale spending plan in 2026 may push up inflation, and policies may tighten by then, weakening the exchange rate's constraints on monetary policy. In the long run, if US tariffs are implemented, the euro may adjust more significantly, and wide fluctuations between 1.14 and 1.20 may become the norm; some differences in the euro area will restrict central bank actions, forcing them to balance between interest rate cuts and anti-inflation.
The above content is all about "[XM official website]: The weakening of the euro provides breathing space for the ECB, but the trade war is still in the darkness of the clouds" and is carefully xmspot.compiled by the editor of XM Forex. I hope it will be helpful to your transactions! Thanks for the support!
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