The Euro has remained steady after receiving a strong boost from the European Central Bank (ECB). The ECB’s decision to raise key lending rates once again on Thursday has propelled the Euro to five-week highs against major currencies. The move comes as the ECB tackles stubborn inflation in the Eurozone and signals its commitment to a tightening monetary policy.

ECB’s Decision to Raise Rates Underpins Euro’s Five-Week Highs

ECB President Christine Lagarde’s announcement that rates are likely to rise again as early as next month has reinforced the market’s confidence in the Euro’s upward trajectory. Lagarde highlighted that inflation has been persistently high in the currency bloc and emphasized the need for action. The ECB’s inflation forecasts have also been revised upwards, indicating a more aggressive stance against rising prices. Projections now show annualized price rises reaching 5.4% this year, up by 0.1 percentage points from previous estimates, with upward revisions for the following two years as well.

The ECB’s decisive move has ignited a surge in EUR/USD, pushing the currency pair to five-week highs. However, in Friday’s Asian and European trading sessions, the Euro has not made significant further gains. Nevertheless, there is a clear contrast between the ECB’s aggressive monetary policy tightening and the US Federal Reserve’s cautious approach. The Fed has paused its rate hikes to assess their impact, despite expecting the need for future increases.

It is worth noting that the markets are already pricing in another US interest rate increase next month. As economic data continues to trickle in, Euro bulls must remain cautious. This afternoon, the University of Michigan will release its highly anticipated consumer sentiment survey, which could potentially impact the Euro’s performance. While the survey alone may not be sufficient to dent the Euro’s impressive week, its results could provide valuable insights.

EUR/USD’s Thursday surge has propelled it above an already steeply rising uptrend line, indicating bullish momentum. The currency pair is now trading within a range defined by May 11’s closing low of 1.09124 and May 3’s closing high of 1.10613. The latter marked a nearly fifteen-month peak for the Euro. This significant price movement raises the question of whether the bulls have become overly optimistic, both from a technical and fundamental perspective. However, it will be interesting to observe whether the Euro can maintain its position within this range by the end of the week. If it succeeds, the recent highs may be challenged again, possibly in the following week.

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Psychological support for EUR/USD can be found around the 1.09 handle, which aligns closely with the current market level. Below that, additional support is expected in the 1.0860 region, which held during the period of May 15-17. In the event of a breakdown, trendline support at 1.08214 could come into play.

IG’s sentiment index indicates some caution among traders, with 63% of them being net short on the Euro. This suggests a possibility of overbuying in the market, a sentiment that is also reflected in the Relative Strength Indicators. Traders who remain undecided may choose to wait and observe whether this week’s gains can sustain their momentum.

Conclusion

In conclusion, the Euro has received a strong boost from the ECB’s hawkish stance, leading to five-week highs against major currencies. The ECB’s decision to raise rates and its upward revisions to inflation forecasts have bolstered confidence in the Euro’s performance. However, with the US Federal Reserve potentially increasing rates next month and economic data influencing market sentiment, Euro bulls should remain vigilant. The currency’s ability to maintain its position within the current trading range will be a crucial factor in determining its future trajectory.

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