Tomorrow, July 18, the European Central Bank will hold its next – July – meeting. It cannot be said that the July meeting is merely routine, although the formal outcomes of this event are indeed predetermined. The regulator is likely to keep all monetary policy parameters unchanged: the probability of this scenario is close to 100%.

Nevertheless, the July meeting will likely provoke significant volatility for the EUR/USD pair, as it will determine the prospects for monetary policy easing. Essentially, the intrigue of the July meeting boils down to one question: will the ECB lower interest rates in September or adopt a wait-and-see approach? Previous signals have been ambiguous, so the intrigue of the July meeting remains.

According to general market expectations, by the end of the year, the European Central Bank may make two more rate cuts, totaling 25 basis points. However, data on inflation growth in the Eurozone, published in early July, paints a contradictory picture.

For example, the CPI growth report for June reflected a slight slowdown in the overall consumer price index (2.5%) and stagnation in the core index (2.9%). The core CPI showed a downward trend for 9 months (from August 2023 to April 2024 inclusive), reaching 2.7%. However, in May it accelerated to 2.9% and remained at this level in June. Another inflation indicator – the Eurozone producer price index – came in at -0.2% month-on-month (against a forecast of -0.1%) and -4.2% year-on-year (against a forecast of -4.1%).

Commenting on these releases, ECB President Christine Lagarde stated that the Central Bank has made progress in disinflation, as key inflation indicators are "moving in the right direction." She indicated that the regulator will not lower rates in July but did not rule out further steps towards easing monetary policy at subsequent meetings. Her main message was that the June rate cut did not signify the start of a sequential cycle: corresponding decisions will be made from meeting to meeting. For example, ahead of the July meeting, fundamental conditions for an additional step towards easing have clearly not formed. Whether they will form by September is an open question. Everything will depend on the dynamics of key macroeconomic indicators, primarily in the area of inflation.

It can be assumed that this message will be incorporated into the accompanying statement. Similar theses are likely to be voiced by Christine Lagarde at the final press conference. The European Central Bank will certainly not want to commit to specific deadlines and volumes for rate cuts.

At the same time, the lack of clear "announcing" signals will be compensated by declarative signals. That is, the markets will once again be assured that the path to policy easing is a priority. However, the Central Bank will note that this path is winding, bumpy, and dependent on many factors, so there can be no talk of a "roadmap."

Here we can also recall the minutes of the June ECB meeting, which reflected the concern of the Council members about inflationary prospects. In particular, the members of the regulator noted that wage growth turned out to be unexpectedly high, as did the inflation rate in the services sector. Inflation, according to the Central Bank, turned out to be more resilient, and the risks to the inflation forecast "are skewed to the upside."

At the same time, ECB members agreed with the proposal of Chief Economist Philip Lane to cut interest rates by 25 points.

As we can see, despite the final unanimous decision, many members of the regulator expressed their concern about inflation. The June CPI growth report, published in July (i.e., after this meeting), should further heighten this concern.

All this suggests that the results of the July ECB meeting will likely be interpreted in favor of the single currency, as the regulator will demonstrate hesitation regarding further steps towards monetary policy easing. The word "if" will become key in the final communique, considering the Central Bank's declared dependence on incoming data.

Any doubts from the European Central Bank will play into the hands of EUR/USD buyers. Especially since the chances of a Fed rate cut at the September meeting are, on the contrary, growing – "by leaps and bounds." According to the CME FedWatch tool, the probability of a 25-point rate cut in September is 93%. Traders also see a 7% chance of a 50-point cut. At the same time, the probability of maintaining the status quo has dropped to zero.

Thus, ambiguous data on inflation growth in the Eurozone, ambiguous minutes of the June meeting, and cautious comments from Christine Lagarde signal that the ECB will not take a "dovish" stance, thereby supporting the euro. The dollar, meanwhile, remains under pressure, so positive (for the euro) outcomes of the July meeting will allow EUR/USD buyers to test the nearest resistance level at 1.0960 (the upper line of the Bollinger Bands indicator on the daily chart) and possibly approach the boundaries of the 10th figure.