Key Takeaways:
The euro's recovery above $1.1450 faces its biggest test this week as the European Central Bank prepares to deliver its latest policy decision, with markets split on whether officials will signal a rate cut or hold steady.
The euro edged higher to near $1.1450 on Monday, recovering from last week's lows, as traders turned their focus to the European Central Bank's upcoming policy decision that will determine whether the single currency can break above its 100-day moving average. The pair remains capped below that technical level after failing to sustain gains above $1.1480 in the previous session, according to FXStreet data.
"The ECB faces a difficult communication challenge — inflation is moderating but services prices remain sticky, and the growth outlook is deteriorating," said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. "How they balance these competing pressures will determine the euro's direction for the next month."
The euro's recovery comes as the eurozone economy shows signs of slowing, with the composite PMI falling to 50.9 in June from 52.2 in May, according to S&P Global data. The European Central Bank last cut its deposit rate by 25 basis points to 3.25% in June, its second reduction of the year following the initial cut from 3.75% to 3.50% in April. OIS markets currently price a 65% probability that the ECB holds rates steady at the July meeting, with the remaining 35% pricing a quarter-point cut to 3.00%.
The interest rate differential between the eurozone and the United States remains a key driver for EUR/USD. The Federal Reserve has held its benchmark rate at 4.25% to 4.50% since January, after cutting by 100 basis points from the 5.25% to 5.50% peak reached in July 2024. The narrower gap — roughly 100 basis points between the ECB's 3.25% and the Fed's 4.25%-4.50% range — has provided some support for the euro, though the dollar retains a yield advantage that caps upside.
The last time the ECB used language suggesting a data-dependent pause was in April, when it cut rates but emphasized that future moves would depend on incoming data. In the month following that decision, EUR/USD rose 2.3% as markets interpreted the stance as less dovish than expected. A repeat of that scenario could push the pair toward $1.1650, while a clear signal of a September cut could send it back below $1.13.
From a technical perspective, the 100-day moving average at $1.1480 represents the immediate resistance level, with a break above that opening the path toward $1.1550. On the downside, support sits at $1.1380, the June low, with a break below that exposing the $1.13 handle. The 50-day moving average at $1.1420 has provided intraday support during the current recovery.
The broader outlook for EUR/USD also depends on the relative pace of monetary easing between the ECB and the Fed. Markets price two additional Fed cuts by year-end, which would bring the federal funds rate to 3.75% to 4.00%, while the ECB is expected to deliver at least one more cut, potentially bringing its deposit rate to 3.00%. If both central banks ease at a similar pace, the rate differential remains stable, limiting directional conviction in the pair.
The ECB's decision is scheduled for Thursday, July 24, followed by a press conference with President Christine Lagarde. The Fed's next decision follows on July 30, creating a week of central bank risk that will set the tone for EUR/USD into August.
This article is for informational purposes only and does not constitute investment advice.
