On Thursday, the announcement of the European Central Bank’s monetary policy resulted in a widespread strengthening of the euro. During late afternoon trading, EUR/USD experienced a gain of approximately 1.10% to $1.0945, marking its strongest performance in five weeks. Additionally, EUR/JPY demonstrated an even greater increase, rising by 1.25% to ¥153.55, which is the highest rate achieved in 15 years and a significant accomplishment for the shared currency.
Today’s market movement can be attributed in part to the actions of the European Central Bank (ECB). The ECB has increased borrowing costs by 25 basis points, resulting in a deposit facility rate of 3.50%, which is the highest it has been in over twenty years. Furthermore, the institution has revised its inflation forecasts for the years 2023-2025 by 0.1%, now projecting rates of 5.4%, 3.0%, and 2.2% for these respective periods.
President Lagarde commented on the policy outlook, indicating that there is still work to be done to achieve price stability. It is highly probable that policymakers will implement another rate hike at the upcoming July meeting, as projections suggest that CPI will remain elevated for an extended period. This guidance has led to a reevaluation of the hiking cycle, with swaps now predicting an 80% likelihood of rates reaching 4% by October.
Although interest rate expectations may increase slightly in the short term, the progression will be restricted due to escalating negative economic risks. If the European Union’s economy continues to decline leading up to summer, investors may retract their speculations of interest rate hikes past the July meeting, resulting in hindrances for the euro, particularly when compared with the U.S. dollar.
EUR/USD Technical Analysis
The recent rally has led to an enhanced technical outlook for EUR/USD. The chart provided highlights two significant bullish developments that are noteworthy. Firstly, the pair has regained the trendline that has been guiding its upward trajectory since late last year. Secondly, prices have surpassed the 50-day simple moving average.
The current sentiment indicates that EUR/USD may experience further upward movement in the short term. However, this is contingent on the currency pair closing above 1.0915 by the end of the week. Should this occur, it is likely that buying interest will increase, facilitating a climb towards the highs of 2023, which are approximately 1.1090. If there is additional strength beyond this point, attention will turn to the psychologically significant level of 1.1200.
In the event that EUR/USD is unable to maintain its recent breakout and declines below 1.0915 and subsequently 1.0855, it is possible that sellers will reenter the market, leading to a decline towards 1.0790/1.0755. Although prices may stabilize around these levels before experiencing a rebound, if a breakdown occurs there is a likelihood of a retest of the May lows.