The euro did something this week that should have been impossible: it fell in the same two weeks that the European Central Bank (ECB) carried out its first interest rate hike since 2023. EUR/USD fell to a recent multi-week low near 1.1400 before recovering to a preliminary low near 1.1450; the lesson is that not every interest rate raise is a vote of confidence. The ECB tightened policy because the energy shock forced it, not because the eurozone economy is on fire. This distinction prevents the single currency from turning a hawkish central bank into a rally.
A journey that smells of surrender
Look at what the ECB actually did and the connection becomes obvious. It raised the deposit rate for the first time in almost three years, while cutting growth forecasts and raising inflation forecasts, which is a clear signal of stagflation. Inflation in the euro zone has hit its highest level in almost three years on rising energy costs linked to disruptions in the Strait of Hormuz, even though the bloc’s economy contracted in the first quarter. Tightening in this mix is ​​a defensive move; currency markets know the difference between a central bank hike based on strength and a hike because it has no choice.
Overtaken by the Atlantic
Even in the narrow issue of exchange rate differences, the euro is losing. The ECB linked its raise to guidance without a predetermined path, which markets read as an isolated observation rather than the start of a campaign; The German Bund’s yields barely budged. Meanwhile, the Federal Reserve (Fed) kept the interest rate at 3.75% but adjusted its scatterplot upwards, pricing in its own raise from a position of relative economic strength, with the US dollar index remaining at a 13-month high. When both sides lean hawkish, the currency associated with a stronger economy and stronger conviction wins; at the moment it is clearly the dollar.
Jumping on a compact leash
The short-term picture is the part of the euro story that favors the bulls, and only the right one at that. The price has broken a preliminary low near 1.1450 and the hourly Stochastic Relative Strength Index (Stoch RSI) has entered an overbought condition after bouncing off the lows, which means that the immediate move is stalling. There is room for a correction towards the 1.1500 area, although it remains on a compact leash: the daily chart is below both the 50-day and 200-day exponential moving average (EMA) centered near 1.1600, with the broader trend still pointing lower.
A wall of speeches from ECB officials and Tuesday’s ever-decreasing flash prints of the Purchasing Managers’ Index (PMI) won’t change that calculus; whatever rebound the euro manages, it is unlikely to survive the balmy US data reading next Thursday, when the third estimate of first-quarter gross domestic product (GDP) and the May consumer expenditure price index (PCE) coincide at 12:30 GMT.
Resistance: The first test is the 1.1500 area, then 1.1550; a heavier barrier is the 1.1600 zone, where the 50-day and 200-day EMAs converge and any recovery would have to prove successful.
Support: The preliminary low near 1.1450 is the level that bulls need to defend. Below is the run to 1.1400 and this week’s lows; a spotless break here reopens the downtrend.
Deviation: Tactically neutral with the possibility of a short-term rebound towards 1.1500 while maintaining 1.1450, but bearish in the long term. The euro remains hostage to the dollar; next week’s balmy US PCE rate is the most likely factor to push back to 1.1400 and beyond. Only the cushioned print of US inflation gives the rebound real legs.
EUR/USD hourly chart
Frequently asked questions about the euro
The euro is the currency of the 20 European Union countries belonging to the euro zone. It is the second most widely traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% discount on all trades, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the euro area. The ECB sets interest rates and manages monetary policy. The ECB’s primary task is to maintain price stability, which means controlling inflation or stimulating growth. Its basic tool is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the euro zone’s national banks and six lasting members, including ECB President Christine Lagarde.
Inflation data in the euro area, measured by the Harmonized Index of Consumer Prices (HICP), is an critical econometric indicator for the euro. If inflation rises more than expected, especially above the ECB’s target of 2%, this obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to interest rates will typically benefit the euro as they make the region more attractive as a place to park money for global investors.
The published data are used to assess the condition of the economy and may affect the euro. Indicators such as GDP, PMIs for industry and services, employment and consumer sentiment surveys may influence the direction of the common currency. A robust economy is good for the euro. Not only will it attract more foreign investment, but it may prompt the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is frail, the euro will likely fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) is particularly critical as they constitute 75% of the eurozone economy.
The next critical data release for the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only appreciate in value due to the additional demand generated by foreign buyers wanting to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
