EUR/USD retreats from highs ahead of the ECB meeting and with tariffs deadline looming

• The Euro retreats from over two-week highs against the US Dollar amid growing uncertainty about the EU-US trade deal.
• Investors are likely to keep away from the EUR ahead of Thursday’s ECB monetary policy meeting
• EUR/USD’s immediate bias remains positive, with downside attempts limited above previous highs.

The EUR/USD pair is trading lower on Wednesday, giving away some gains following a 1.3% rally over the last three days. Investors’ concerns about the lack of progress in trade negotiations between the United States (US) and the European Union (EU), combined with a somewhat stronger US Dollar (USD), are keeping the common currency on the back foot.

The Euro (EUR) retreated from two-week highs of 1.1760 against the US Dollar on Tuesday and is trading around 1.1730 in the early European trading session on Wednesday. The immediate trend, however, remains positive after having bounced from last week’s lows at 1.1555, with downside attempts held above a previous resistance at 1.1720.

Risk appetite returned to the market following the announcement of a trade deal between the US and Japan, but is failing to support the Euro. A trade agreement between the EU and US remains elusive, and this is keeping investors on edge. EU representatives will be flying to Washington on Wednesday in an attempt to secure a deal, but the bloc is studying retaliatory measures in case the negotiations fail.

In the economic calendar, the preliminary European Commission’s (EC) Consumer Sentiment Index for July, due at 14:00 GMT, will be the main release on Wednesday. The highlight of the week, however, will be the European Central Bank’s (ECB) monetary policy decision on Thursday, which is expected to provide some clues about the bank’s near-term policy plans and the Eurozone’s economic outlook.

Daily digest market movers: Euro recovery loses steam on trade uncertainty

• The Euro fails to extend its rally for the fourth consecutive day, as high uncertainty surrounding the trade relationship between the EU and the US and the threat of facing 30% tariffs from August 1 are starting to undermine speculative demand for the common currency.
• Beyond that, traders might be cutting some Euro long positions as markets head into the ECB’s monetary policy decision. The bank is widely expected to keep interest rates on hold, as inflation remains steady near the target rate of 2%, but the soft economic momentum of some of the region’s major economies and the prospects of a trade war with the US might heighten hopes of further monetary easing in September.
• Later on the day, the preliminary EC’s Consumer Sentiment Index is expected to have improved somewhat, to a reading of -15 in July from the -15.3 seen on the previous month. These numbers are well below the long-term average, which reflects a soft economic context. Unless there is a positive surprise, these data are unlikely to provide any significant support to the Euro.
• Earlier on Wednesday, US President Donald Trump announced a “massive trade deal” with Japan. Tariffs on imports from the Asian country have been lowered to 15% from the 25% levy announced a few weeks ago, while, according to Trump, Japan will invest $550 billion in the US. The US Dollar picked up from lows following the news.

EUR/USD maintains its positive bias while above 1.1720

EUR/USD is correcting lower after a significant rally over the last three days, which pushed the 4-hour Relative Strength Index (RSI) to oversold levels. The pair, however, maintains its immediate bullish structure intact, with downside attempts contained above a previous resistance, now turned support, at 1.1720.

Further depreciation below the mentioned 1.1720 (July 16, Monday’s highs) would give bears hope for a retest of Tuesday’s lows at 1.1680 ahead of a reverse trendline, now at 1.1645. On the upside, Tuesday’s high at 1.1760 is capping bulls for now and closing the path towards the July 7 highs at 1.1790 and the long-term highs, at 1.1830, hit on July 1.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.