The European currency surged upwards after the ECB meeting, but lost steam afterwards. EUR's further price movements were much more moderate. It is unclear how long this upward momentum would last.
The euro advanced by 0.9% against the US dollar late on Thursday, July 21 in its best performance since May 2022, following the ECB's decision to increase interest rates. The European regulator's rate hike exceeded market expectations.
The European Central Bank agreed on increasing interest rates by 50 basis points from zero to 0.5%. It is the first such move since 2011. Furthermore, ECB representatives said it could raise the rate at the next policy meetings as well.
The euro jumped to 1.0250 on the news, amid concerns that interest rate hikes could exacerbate the sovereign debt crisis in eurozone countries such as Italy.
Political uncertainty in Italy weighed down on European markets earlier. The resignation of Mario Draghi as prime minister could offset investor optimism regarding the euro's upsurge and the resumption of Russian gas deliveries via the Nord Stream pipeline.
However, Nord Stream now operates at only 30% of its capacity, which is insufficient to fully cover Europe's needs and to fill storages for the winter heating period. The EU's energy security is in doubt, which is a bearish factor for EUR.
In this situation, market players could step up bullish bets on EUR/USD. The pair tested the resistance at 1.0200 late on Thursday, gaining bullish momentum and stepping away from parity. Early on Friday, July 22, EUR/USD traded at 1.0190, losing some of its earlier gains.
EUR/USD could slide down to 1.0140-1.0150 after a slight correction. This price range could serve as strong support for the pair, analysts say. However, if the pair breaks below the range, it would likely descend towards 1.0060. If EUR/USD withstands bearish pressure, it could then rise towards 1.0300.
The European regulator is set to finish its quantitative easing program in the near future. At the same time, the ECB is preparing to unveil its new bond-purchase program aimed against fragmentation. This tool is designed to maintain sovereign bond spreads and protect the weaker economies of the eurozone.
These measures indicate that the ECB is not yet ready to fully end its dovish policies. Furthermore, the EU regulator is highly unlikely to quickly close the gap in policy separating the ECB with the Fed. The window of opportunity is now closed. The most important thing the European Central Bank can do right now is stick to its earlier plans and try not to trigger excess volatility in the market.
Many analysts think that the key interest rate in the EU would still be the lowest among developed economies, despite the current actions of the ECB. It remains unclear if investing into European assets is a prudent choice for investors at this point. Next week's policy decision by the Federal Reserve could clear the confusion. The regulator is expected to increase interest rates by 0.75%. This move would give support to US equities and the US dollar, but would also push down the euro, analysts say.