The European currency found itself in a difficult situation: its path to recovery is quite thorny. The euro's succeeding dynamics depends on two key factors: an increase in the European Central Bank interest rate and a solution to the problem with gas supplies to Europe.
On Thursday, July 21, the European currency was able to recover and return to a two-week high against the US. The reasons are the expectation of a significant increase in the interest rate by the ECB for the first time since 2011 and the resumption of the operation of the Russian gas pipeline after its maintenance.The euro developed a rally against the dollar in the middle of this week, offsetting 50% of its July decline.
According to experts, this indicates a turning point in the market, as a result of which the euro and other key currencies will recover, and the greenback will slow down its growth. The EUR/USD pair cruised around 1.0225 on the morning of Thursday, July 21, maintaining a cheerful mood. The single European currency traded above the level of 1.0200 after statements about a significant increase in interest rates (by 50 bp) from the central bank.
According to experts, a significant increase in the key rate will be a catalyst for the euro's growth. Many analysts consider a 50 bp rate hike as the best option for EUR. At the same time, a possible increase in the interest rate by only 25 bp will be negative for the euro or will have almost no effect on its dynamics.
The specialists admit that at the current meeting the ECB will announce the end of the era of negative interest rates in Europe. This is possible due to the increase in key indicators of the cost of borrowing by 0.50%. At the same time, analysts believe that even the hawkish attitude of the central bank does not guarantee a steady rise in the euro. The situation is complicated by the Russian-Ukrainian conflict and the worsening prospects for economic growth in Europe.
At the moment, markets are focused on the ECB's actions, but we should not forget about the potential and implemented ways to tighten the monetary policy by its American counterpart. Now the Federal Reserve is focused on the pros and cons of raising the key rate by 100 bp. This initiative is under discussion. Recall that the central bank will hold a meeting next week, within which it can implement the above measures.
Recent reports from Fed officials indicate that the central bank has now reached the limit of rate hikes. At the same time, experts believe that the Fed, along with the ECB, allows a further increase in interest rates. According to preliminary estimates, the Fed's decisions on the key rate have a positive effect on the economy.
Note that for several days the greenback has been adjusted against the euro and other currencies. As for the euro, it has grown significantly. At the same time, many analysts are bullish on the greenback and bearish on the euro. However, the current price dynamics indicates a possible reversal of the currency market, which will result in the strengthening of the EUR and a short-term retreat of the USD.
During this month, the euro fell below parity with the dollar twice, but quickly recovered. Such price "swings" are caused by the conflict in Eastern Europe and the so-called "energy wars" that broke out between Russia and the EU. In such a situation, the issue of replacing Russian resources is extremely relevant for the European bloc and will remain a key task for the coming years.