The positive news from the EU summit and the absence of serious surprises from the ECB should have triggered a rally in the euro. However, the single currency's growth was very modest.
As expected, the European Central Bank left interest rates unchanged and increased the size of its emergency bond-buying program by €500 billion to €1.85 trillion. The only thing the surprised market participants was the fact that the regulator extended the pandemic emergency purchase programme (PEPP) to at least the end of March 2022.
At the final press conference, ECB President Christine Lagarde said that the regulator would maintain "soft" monetary policy for quite a long time. However, if financial conditions in the EU remain favorable, the full-fledged quantitative easing program will no longer be necessary.
According to Lagarde, the Eurozone economy is likely to face a significant downturn in the fourth quarter due to the second wave of COVID-19 in the region, but at a slower pace compared to the second quarter.
Also, the euro's growth puts a downward pressure on inflation, the head of the ECB noted. However, the exchange rate of the common European currency is not the goal of the regulator's policy.
Christine Lagarde's statements supported the euro, as investors expected more "dovish" comments from the ECB.
Later, even more favorable news for the euro came out. EU leaders approved a €1.8 trillion trillion seven-year budget for the euro area, having won approval from Hungary and Poland, which had long opposed it. This agreement also paves the way for the European Union's 750 billion euro post-pandemic recovery fund.
Against this background, the euro gained more than 0.5% against the US dollar on Thursday, rising above $1.2155. At the same time, the US dollar index fell by almost 0.4% to 90.71 points.
The greenback was affected by weak statistics from the United States. Thus, initial unemployment claims in the country over the past week increased by 137 thousand, the highest number since March.
In addition, the US dollar came under pressure from reports that a key Food and Drug Administration advisory panel recommended the approval of Pfizer and BioNTech's coronavirus vaccine for emergency use in the country.
However, as early as Friday, the US currency was able to recover and rebound from its 2,5-year lows amid sentiment deterioration due to the risk of a no-deal Brexit as well as fewer chances to quickly adopt another US economic relief package.
Senate Majority Leader Mitch McConnell still refuses to adopt a new bipartisan $908 billion stimulus plan.
According to experts, the main question is whether the implementation of additional stimulus measures through Congress will become more urgent following disappointing data on the labor market, or whether negotiations will continue at the beginning of 2021.
Meanwhile, London and Brussels are gearing up for a no-deal Brexit.
The EU has released an action plan in case the alliance fails to reach an agreement on a future trade partnership with the United Kingdom by the end of this year.
British Prime Minister Boris Johnson, in turn, noted the high probability that there would be no deal with the EU due to serious disagreements on a number of controversial issues.
Amid the dollar's recovery across the board, the euro/dollar rally stalled around 1.2160.
Cautious optimism from the ECB, generally positive macroeconomic statistics from Europe, as well as the coronavirus curve flattening create fundamental preconditions for the euro's growth. However, the risks associated with the negotiations between the UK and the EU on Brexit as well as the next round of aid discussions pose a serious challenge to euro bulls.