Key Moments
- EUR/USD pulled back to around 1.1560 after reaching a weekly high of 1.1616 on Thursday.
- The US Dollar Index was last up 0.2% near 99.35 after dropping over 1% to around 99.00 on Thursday.
- Reports indicating the ECB could discuss rate hikes in April supported the Euro after Thursday’s policy decision.
EUR/USD Slips as Dollar Attempts Recovery
The EUR/USD pair eased lower during the Asian session on Friday, giving back part of its recent gains after touching a weekly high of 1.1616 on Thursday. The currency pair was down 0.2% and trading near 1.1560, as the US Dollar (USD) tried to stabilize following a sharp sell-off.
Earlier weakness in the Dollar had been driven by fading concerns about a major divergence between Federal Reserve (Fed) policy and that of other central banks, but the latest session saw some reversal of that move.
US Dollar Performance Against Major Currencies
The following table shows the percentage change of the US Dollar against a basket of major currencies. On the day, the USD showed its strongest relative gains versus the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.24% | 0.17% | 0.38% | -0.07% | 0.03% | -0.16% | 0.13% | |
| EUR | -0.24% | -0.07% | 0.16% | -0.29% | -0.21% | -0.39% | -0.11% | |
| GBP | -0.17% | 0.07% | 0.23% | -0.25% | -0.14% | -0.33% | -0.04% | |
| JPY | -0.38% | -0.16% | -0.23% | -0.45% | -0.35% | -0.55% | -0.24% | |
| CAD | 0.07% | 0.29% | 0.25% | 0.45% | 0.10% | -0.09% | 0.20% | |
| AUD | -0.03% | 0.21% | 0.14% | 0.35% | -0.10% | -0.19% | 0.10% | |
| NZD | 0.16% | 0.39% | 0.33% | 0.55% | 0.09% | 0.19% | 0.29% | |
| CHF | -0.13% | 0.11% | 0.04% | 0.24% | -0.20% | -0.10% | -0.29% |
The heat map indicates how each major currency moved against the others. The base currency is taken from the left-hand column, and the quote currency from the top row. For instance, selecting the US Dollar in the left column and moving across to the Japanese Yen cell shows the percentage change for USD (base)/JPY (quote).
DXY Rebounds After Sharp Drop
At the time of writing, the US Dollar Index (DXY) – which measures the currency against six major peers – was up 0.2% and trading close to 99.35. This follows a decline of more than 1% to about 99.00 on Thursday.
That earlier fall came after several major central banks highlighted risks that inflation could move higher and pointed to an extended pause, reflecting the impact of rising energy costs amid the conflict in the Middle East. Those comments reduced worries about a broader divergence between Fed policy and that of other key central banks.
ECB Holds Rates; Hawkish Speculation Lifts Euro
The European Central Bank (ECB) opted to keep interest rates unchanged on Thursday. The decision was framed against a backdrop of uncertainty around inflation and growth linked to joint military operations by the United States and Israel against Iran.
During the subsequent press conference, ECB President Christine Lagarde cautioned that the “increase in energy prices will drive inflation above 2% in the near term”.
Later in the North American session on Thursday, a Reuters report indicated that the ECB might consider discussing an increase in key borrowing costs in April and could move to raise rates in June if elevated energy prices persist. That report triggered a strong upward reaction in the Euro.
Market participants looking for further insight into the ECB’s policy outlook and more detail around any potential April rate-hike discussions are expected to track remarks from officials who typically provide guidance on future monetary conditions following policy meetings.
ECB: Mandate and Policy Tools
The European Central Bank (ECB), headquartered in Frankfurt, Germany, serves as the central bank for the Eurozone and is responsible for setting interest rates and managing monetary policy in the bloc.
Its core objective is to maintain price stability, defined as inflation at around 2%. The ECB primarily uses interest rate adjustments to pursue this mandate. Higher interest rates generally support a stronger Euro, while lower rates tend to have the opposite effect.
Monetary policy decisions are taken by the ECB Governing Council at eight scheduled meetings per year. The Council consists of the heads of the national central banks of Eurozone member states and six permanent members, including ECB President Christine Lagarde.
QE and QT: Impact on the Euro
In exceptional circumstances, the ECB can deploy Quantitative Easing (QE). Under QE, the central bank creates Euros and uses them to purchase assets – typically government or corporate bonds – from banks and other financial institutions. This process usually weighs on the Euro, as it expands liquidity and lowers yields.
QE is typically used when rate cuts alone are unlikely to ensure price stability. The ECB has implemented QE in periods when inflation was persistently weak and during severe economic disruptions, such as the Great Financial Crisis, as well as during the covid pandemic.
Quantitative tightening (QT) is the opposite of QE. It generally follows periods of QE once the economy improves and inflation begins to pick up. Under QT, the ECB stops adding to its bond holdings and no longer reinvests principal payments from maturing securities. This reduction in balance sheet support is typically viewed as positive for the Euro.
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