Euro might extend losses if the ECB delivers a dovish hike

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The Euro (EUR) edges up against the US Dollar (USD) on Thursday but remains trapped within the range of the last two days, around 1.1550, not far from two-month lows, near 1.1500.

EUR/USD consolidates around 1.1550, hovering within the last two days' range.
The ECB is widely expected to hike rates by 25 basis points later in the day.
Growing tensions in the Middle East and hot US inflation data are supporting the US Dollar.

The Euro (EUR) edges up against the US Dollar (USD) on Thursday but remains trapped within the range of the last two days, around 1.1550, not far from two-month lows, near 1.1500. Fresh US strikes on Iran are weighing on risk appetite, while the wide market expectations that the European Central Bank (ECB) will hike rates later on Thursday keep the Euro afloat.

The ECB concludes its two-day monetary policy meeting later in the day, and a 25-basis-point rate hike is practically written in stone. The decision is unlikely to provide any significant support to the pair, as investors will be more attentive to the bank’s forward guidance. In that sense, a lack of commitment to further monetary tightening might be considered a dovish message and send the Euro tumbling.

Market sentiment, meanwhile, remains cautious, following a new round of US strikes against Iranian targets and US President Donald Trump’s threat of further attacks if Tehran fails to sign a deal. Iranian authorities announced the closure of the Strait of Hormuz, and the Islamic Revolutionary Guard Corps (IRGC) said that two vessels attempting to cross the waterway were targeted.

In the US, on Wednesday, Consumer Price Index (CPI) figures confirmed that inflation accelerated to a 4.2% year-over-year pace in May. This is the highest level in more than three years and more than twice the Federal Reserve’s (Fed) 2% target, which boosts expectations of Fed rate hikes later this year and provides additional support to the USD.

Technical Analysis: Euro remains vulnerable near 1.1500

EUR/USD holds in a neutral consolidation after a modest recovery from recent lows. The broader bearish trend, however, remains in play. Indicators on intraday charts are mixed. The 4-hour Relative Strength Index (RSI) shows subdued bullish pressure at levels below 50, and the slightly positive Moving Average Convergence Divergence (MACD) hints at a tentative attempt to stabilize rather than a decisive bullish reversal.

Resistance at the 1.1580 previous support area (May 21 low) holds bulls and closes the path towards the June 4 and 5 highs, around 1.1645, ahead of the late-May highs, at 1.1685.

On the downside, a confirmation below Monday's low, near 1.1505, would give fresh hope for bears and expose the March 30 low, at 1.1443. Further down, the year-to-date low, at 1.1411 (March 13 low), will come into focus.

(The technical analysis of this story was written with the help of an AI tool.)

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.