The euro has historically performed well in July, making it an interesting month for traders to keep an eye on EUR/USD.
The euro does well in July
Over the past five years, July has been the second-best month for the currency pair, with an average gain of +1.21%. If this seasonal trend were to continue, it would suggest a bullish trend for the euro during this time of the year. Looking back even further, we see that June tends to mark a seasonal bottom for EUR/USD, which rises off the lows in July on average.
EURUSD Seasonal average (1986-2016)
Source: Seasonalcharts.com
Meanwhile, the US dollar typically experiences modest losses in July. This adds to the favorable outlook for the euro, as a weaker dollar can contribute to its strength. Additionally, other currencies such as the Australian dollar (AUD), Canadian dollar (CAD), and New Zealand dollar (NZD) have also seen positive averages over the past five years, further supporting the notion of a bullish July in the forex market.
It's noteworthy that July has historically been a good month for US stocks and gold prices. This aligns with the positive performance of the euro, as it suggests a general market sentiment that favors riskier assets during this time.
A hawkish ECB is euro-bullish
One crucial factor to consider is the European Central Bank's (ECB) stance on monetary policy. A hawkish European Central Bank (ECB) which just raised interest rates as the Federal Reserve paused, indicates a more restrictive approach and should be beneficial for the euro.
Eurozone inflation (2018-2023)
Source: New York Times
Investors will closely watch the Eurozone inflation data to gauge the ECB's position. If the data confirms the ECB's hawkish stance, it is likely to support a strong euro. The market's confidence in the ECB's determination to tackle inflation plays a significant role in shaping expectations for the euro. Stubbornly high core inflation suggests that the ECB might take additional measures to combat rising prices. However, the ECB must also consider signs of broader economic weakness.
Weak Eurozone data is a bearish risk
The current economic landscape in the Eurozone is raising concerns. Both the Fed and the ECB face debates and speculation surrounding their next moves against the backdrop of increasing worries about an economic slowdown on both sides of the Atlantic.
During the recent Policy Discussion Panel at the ECB Forum on Central Banking in Sintra, key figures made notable remarks on monetary policy. ECB President Christine Lagarde emphasized the high probability of a rate hike in July. Federal Reserve Chief Jerome Powell argued that policy measures have not been restrictive for an extended period.
Turning to economic data, there are signs of weakness in the Eurozone. Consumer confidence in Germany, as measured by GfK, declined to -25.4 for the month of July. This indicates a pessimistic outlook among consumers in the largest economy of the Eurozone.
GFK German consumer confidence (2021-2023)
Source: GFK
Based on historical seasonality patterns and the current market environment, July appears to be another good month for the euro in the forex market. The positive performance over the past five and ten years and the ECB's restrictive approach to inflation support a bullish outlook for the currency. However, traders should remain attentive to the Eurozone inflation data and the broader economic weakness in the region, as it could potentially impact the euro's trajectory.
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