ECB Forum will set a new benchmark for the markets

EUR/USD

Key zone: 1.1350 - 1.1400

Buy: 1.1450 (on strong positive fundamentals) ; target 1.1650-1.1700; StopLoss 1.1380

Sell: 1.1300 (on a pullback following a retest of 1.1400) ; target 1.1150-1.1050; StopLoss 1.1370

The world's four largest central banks conduct their exchange of views behind closed doors, yet it is the public part of the forum that becomes the main source of signals for global financial markets. The annual ECB Forum on Central Banking has traditionally been regarded as one of the most significant events of the European summer, as it is here that investors have an opportunity to adjust their expectations regarding the ECB's future policy.

On July 1 at 13:00 GMT, market participants' attention will be focused on the Portuguese town of Sintra, where ECB President Christine Lagarde, Federal Reserve Chair Kevin Warsh, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem will appear together on one stage as part of the forum. Additional informational background will be provided by speeches from other representatives of the world's leading central banks.

Formally, the event is a panel discussion. However, for professional market participants, such meetings have long become one of the most important reference points for assessing the future trajectory of global monetary policy.

The forum's official theme is "Shaping Europe's Future: Innovation, Growth and Stability." Investors, however, are interested in very different questions: where the boundary lies between fighting inflation and supporting economic growth, how likely further monetary tightening is, and whether the world's leading central banks are prepared to coordinate their actions amid ongoing geopolitical instability.

This year's forum is particularly important because it is taking place just a few weeks after the June meetings of the world's major central banks.

• A significant portion of positive expectations regarding the euro has already been priced into the market. If Christine Lagarde confirms her commitment to a hawkish anti-inflation policy or suggests that interest rates may need to remain high for a longer period, yields on European government bonds could begin rising again, providing additional support for the single currency. In this case, the euro could continue strengthening, especially if the Federal Reserve Chair's comments prove less hawkish.
• The opposite scenario is also possible. If ECB officials focus on signs of slowing growth in the eurozone, increasing external risks, or the need for caution in future interest-rate decisions, market participants will quickly revise their expectations regarding further policy tightening. In such a situation, long euro positions would become the most vulnerable, as a substantial portion of speculative capital is already positioned for further appreciation of the European currency.
• If Federal Reserve Chair Kevin Warsh confirms his commitment to a low-information approach, volatility in the foreign exchange market could increase significantly. In that case, investors will be forced to rely even more heavily on incoming macroeconomic data alone. Any unexpected comments from Federal Reserve officials could alter the yield differential between U.S. and European government bonds, which traditionally remains the primary driver of the EUR/USD exchange rate.

The European equity market will also be highly sensitive to the forum's outcome.

For the banking sector, more hawkish ECB rhetoric could become a positive factor thanks to the preservation of high interest margins. At the same time, technology companies, real estate developers, and other capital-intensive industries may face additional pressure because of elevated borrowing costs.

Higher volatility is also likely in the government bond markets of Germany, France, and Italy, where even minor changes in expectations regarding future ECB policy could trigger noticeable fluctuations in yields.

And what is the result?

Experience from previous forums shows that financial markets react most strongly not to the prepared speeches of central bank leaders, but to their answers during the open discussion. It is these spontaneous comments that allow investors to better understand the actual sentiment of the world's leading monetary policymakers and promptly adjust their expectations regarding future monetary policy.

Therefore, attention should be paid not only to Christine Lagarde's statements, but also to any divergence between the positions of the ECB and the Federal Reserve.

If the European regulator maintains a more hawkish stance than its U.S. counterpart, the euro could receive a new impulse for appreciation. However, if the Federal Reserve once again proves to be the more hawkish institution, the European currency may face profit-taking, with pressure spreading across most European financial assets.

So we act wisely and avoid unnecessary risks.

Profits to y’all!