In a rather calm summer week, the ECB meeting is expected to become the biggest source of FX volatility that may determine Euro demand for the rest of the week. The balance of risks for EURUSD is skewed to the downside, as possible clarifications on the strategy review and rates guidance will likely have bearish implications for the Euro. Such an outcome should lead markets to foster belief that exit from asset purchase programs will take more time than expected.

Defensive trading dominated the market in the first half of the week, offering solid support to USD against pro-cyclical currencies with the exception of the CAD, which got protracted boost after the BoC announced a slowdown in QE with possible complete halt by the end of 2021. The US economy data is not particularly interesting and are unlikely to produce substantial market moves as markets brace for crucial Fed meeting next week.

Recent Lagarde comments and published ECB strategy review raised stakes ahead of today's meeting. The fact is that today information may appear that will force the markets to reconsider pace of reduction in asset purchases by the ECB. It is likely that by cutting back on purchases as part of the pandemic asset-buying program, the ECB will increase purchases under the standard program (APP) as the EU economy continues to struggle to kick-start inflation. Also, if the ECB announces symmetric inflation targeting, it’ stance will become a little more bearish, as the ECB will try to correct both undershoot and overshoot in inflation with its instruments. In contrast, the Fed recently announced as part of its policy review that it will allow the economy and inflation to overheat, as it is harder to spur inflation than to curb its excessive growth.

If the result of today's meeting is indeed a slower exit of the ECB from QE, EURUSD may further correct downward towards the lower part of the 1.17-1.18 range. Yesterday's strengthening could have given sellers the respite before a deeper dive. If the meeting is held without special events with a predominance of duty phrases, the downward scenario may be canceled with a possible breakdown of the downward triangle pattern upwards consolidating above the 18th figure:

Most of the possible divergence of ECB and Fed policies will begin to manifest itself in 2022, when, as expected, central banks will largely complete their anti-crisis policies and turn their focus on long-term goals. Then the influence of central banks on the EURUSD rate will likely become even more pronounce.