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- The EUR/USD pair rose to a two-year high after the ECB delivered its interest rate decision.
- The bank left interest rates unchanged and boosted its quantitative easing by about 500 billion euros.
- European countries also reached a deal on the bloc’s budget.
The EUR/USD rally continued in overnight trading as traders focused on the interest rate decision by the European Central Bank, Pfizer vaccine, and EU budget deal.
ECB interest rate Decision
In its final interest rate decision of the year, the ECB decided to leave interest rates unchanged for the eighth consecutive month. That was in line with the previous guidance and analysts estimates.
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In addition to interest rates, the bank decided to provide more support to the European economy by boosting its asset purchase program (quantitative easing) by €500 billion to €1.85 trillion. It will also extend the duration of the purchases to the end of 2022, making it the fastest pace of balance sheet expansion ever.
QE boosts the economy by providing cheap financing to governments. Ultimately, this usually leads to lower borrowing costs by both individuals and businesses. Other central banks like the Fed, Bank of Canada (BOC), Bank of England (BOE), BOJ, and RBA are also implementing such programs.
The ECB decision came at an important point for the EU. The euro is at the highest point in more than two years. This puts European exporters like Bayer and BMW at a disadvantage. Further, the likelihood of a no-deal Brexit is rising by the day, putting more pressure on the economy.
On a positive side, EU member states have reached an agreement on the seven-year budget and the recovery fund. That’s after Poland and Hungary lifted their opposition to the deal because of a law-and-order clause. This means that European countries will now get access to the €750 billion recovery fund and the €1.8 trillion seven-year budget.
The EUR/USD pair is also rising because of the overall risk-on sentiment in the market. This is after the Food and Drug Administration (FDA) gave approval of the vaccine developed by Pfizer and BioNTech. This means that more countries will start delivering the shots in the coming weeks.
EUR/USD technical outlook
The EUR/USD pair is trading at 1.2160, which is close to its highest level since 2018. It is also on track for its fourth consecutive weeks of gains.
On the daily chart, the price has moved above the short, medium, and long-term moving averages. It is also being supported by the rising trendline that connects important lows. In our free forex trading courses, this is usually a sign that bulls are still in control.
At the same time, most oscillators like the Relative Strength Index (RSI), stochastic, and MACD are at their highest levels in months. This means that while the rally could continue, a pullback will also be possible.
