The euro declined in European trading on Friday against a basket of major currencies, retreating from a one-week high versus the US dollar as part of a correction and profit-taking phase, following its strongest daily gain in two months. Despite the pullback, the single currency remains on track for a weekly gain, supported by the European Central Banks hawkish policy stance.

The US dollar has weakened this week from its highest levels in 10 months, as rising energy prices have reshaped global interest rate expectations, with the Federal Reserve remaining the only major central bank not expected to raise rates this year.

Price action

The euro fell 0.3% against the dollar to 1.1553, down from an opening level of 1.1588, after hitting an intraday high of 1.1595.

On Thursday, the euro closed up 1.2% versus the dollar, marking its third gain in four sessions and its strongest daily performance since January 27, driven by the ECB meeting.

Weekly performance

So far this week, the euro is up 1.25% against the US dollar, on track to post its first weekly gain in three weeks.

European Central Bank

As expected, the European Central Bank kept its key interest rates unchanged on Thursday at 2.15%, the lowest level since October 2022, marking the sixth consecutive meeting without a change.

The ECB reiterated its data-dependent approach, emphasizing a meeting-by-meeting strategy without committing to a fixed rate path, while remaining ready to adjust all tools to ensure inflation returns to its 2% medium-term target.

Christine Lagarde

ECB President Christine Lagarde warned on Thursday that the military conflict is casting a shadow over growth and inflation prospects and will have a material and direct impact on prices in the near term.

She added that the external environment remains highly challenging, pointing to ongoing volatility in global trade policies.

European rates outlook

Sources told Reuters that the ECB is likely to begin discussing rate hikes as early as next month.

Following the meeting, money markets increased pricing for a 25 basis point rate hike in April from 1% to 25%.

Investors are now awaiting further economic data from the eurozone, particularly on inflation, employment, and wages, to reassess these expectations.

US dollar

The US Dollar Index rose 0.3% on Friday, rebounding from a one-week low as selling pressure on the currency eased.

The dollar had come under broad pressure on Thursday following policy meetings by central banks in Japan, Switzerland, the UK, and the eurozone, where policymakers signaled a potential shift toward tighter monetary policy in response to the Middle East conflict and its impact on energy supplies.

Analysis

Analysts at JPMorgan noted that while the Federal Reserve appears willing to remain patient in the face of a shock that presents dual risks to its mandate, the ECB seems unusually sensitive.

They added that there is a clear bias toward rate hikes this year, even if the timing and pace remain uncertain.