The EUR/USD currency pair surged to its highest level since July 7, marking a third straight day of gains. It has rallied by 1.67% from this month’s lows, with momentum driving it just below its year-to-date high of 1.1830. 

This move comes ahead of a highly anticipated European Central Bank (ECB) policy decision, placing the euro-dollar exchange rate in the spotlight for traders and investors alike. In this article, Arbitics brokers explain the key elements of the topic with clarity and precision.

Euro Rallies as ECB Decision Looms

The euro’s strength has been a focal point in recent days. The EUR/USD pair’s rise signals a market-wide anticipation of a dovish pause by the ECB. Analysts polled by Reuters expect the ECB to hold its deposit facility rate at 2.00%, with the main interest rate expected to remain at 2.15%.

Such a decision would be consistent with recent messaging from ECB officials. In their latest market note, Morgan Stanley analysts predicted that the central bank would reiterate a cautious stance, mirroring its last guidance. 

The ECB is likely to leave the door open for additional interest rate cuts, without committing to a clear path forward. This balancing act reflects the ECB’s attempt to manage several economic headwinds, chief among them, currency appreciation and external trade risks.

Strong Euro: A Double-Edged Sword

While a stronger euro has contributed to disinflationary pressures, helping tame consumer prices, it has simultaneously posed challenges for European exporters. As the euro gains in strength, exported goods from the EU become more expensive for foreign buyers. Current estimates suggest that the euro’s appreciation has made EU exports roughly 10% more expensive, undercutting the competitiveness of eurozone manufacturers.

These currency dynamics arrive at a tense moment for EU-U.S. trade relations. The US President has warned of a potential 30% tariff on all EU imports starting August 1, unless a revised trade agreement is reached.

The combination of protectionist trade policies and a robust euro could exert downward pressure on euro area GDP growth, complicating the ECB’s monetary policy trajectory even further.

EUR/USD Technical Outlook: Bullish Momentum Builds

From a technical standpoint, the EUR/USD pair remains firmly within bullish territory. Since bottoming at 1.0176 in January, the currency pair has steadily climbed, recently breaching the 1.1750 mark. This rally has been underpinned by strong momentum indicators and favorable price action.

The 50-day and 100-day moving averages (MAs) remain supportive, with the pair comfortably trading above both. This alignment suggests that the prevailing uptrend remains intact. Notably, the price has also broken above the upper boundary of a descending channel, which formed part of a bullish flag pattern, a classic technical continuation signal.

Such a breakout is often interpreted as a precursor to further gains, particularly if the move is confirmed by sustained volume and follow-through buying. The key resistance level now lies at 1.1830, which coincides with the 2024 high. 

A successful breach above this level would likely set the stage for a rally towards the next resistance zone at 1.1900. Conversely, a pullback below the 1.1600 support level would invalidate the short-term bullish setup, potentially leading to renewed bearish pressure.

Fundamental & Technical Convergence

The convergence of technical signals and fundamental catalysts makes the EUR/USD one of the most actively watched forex pairs heading into the ECB decision. With traders pricing in a pause in rate cuts, and the market reacting positively to the ECB’s cautious optimism, the upward momentum in the euro appears well-supported, for now.

That said, the outlook remains fragile. A shift in ECB tone, unexpected remarks about future rate trajectories, or external shocks, such as escalations in trade tensions, could easily derail the current trend. As such, traders should maintain a balanced risk approach, with tight stop-loss levels and a clear eye on macroeconomic developments.

Summary

• EUR/USD has broken out to its highest level since early July, gaining 1.67% month-to-date.
• The rally is driven by optimism ahead of the ECB’s rate decision, with markets expecting a pause in the central bank’s easing cycle.
• The ECB faces a tricky balancing act amid a strong euro, export headwinds, and looming U.S.-EU trade friction.
• Technical indicators suggest continued bullish potential, especially if the pair breaks above 1.1830 resistance.
• A drop below 1.1600 would negate the bullish outlook and may trigger a selloff.

The coming days will likely define the euro’s next directional move. Whether the ECB delivers on expectations or surprises with a hawkish twist, EUR/USD volatility is all but guaranteed. Traders should prepare for swift price action and adjust their forex strategies accordingly.