EUR/USD Slumps to Two-Year Low Following Surprising ECB Monetary Decision

The EUR/USD pair struggled to record any meaningful bullish move on Friday after tapping a two-year low of 1.0757 the previous day. However, Fiber managed to close last week’s session above the 1.0800 support level.

Various sources suggest the primary catalyst for the weak euro came from the European Central Bank (ECB), after the bank’s President, Christine Lagarde, announced that they would not introduce any changes to their monetary policy, dashing popular expectations of a rate hike.

Opposing market expectations, the ECB communicated a more dovish monetary stance, leaving its rates unchanged and maintaining its asset purchase programs, noting it would end in Q3. That said, the monthly net purchases will be €40 billion in April, €30 billion in May, and €20 billion in June.

The official statement from the ECB also noted that the ongoing Russian aggression on Ukraine has thrown a wrench in the wheel of the Europe economy and beyond. It detailed that higher energy and commodity prices are diminishing demand and frustrating production, which naturally triggers higher inflation. It also noted that trade disruptions across the globe, have sparked new shortages of material and input, which extends additional pressure on prices.

Meanwhile, President Lagarde argued that it was “premature” to talk about quantitative tightening, noting that interest rate hikes could come into the picture “sometime after” the APP program elapses.

EUR/USD Price Action Dictated by ECB/Fed Outlooks

ECB policymakers noted that upcoming policy decisions will be determined by incoming data, adding that they would maintain “optionality, gradualism, and flexibility in the conduct of monetary policy.”

In other news, US Federal Reserve officials continue to see the possibility of a 50 basis point rate hike in May, noting that it could pave the way for a reduction of the balance sheet. The varying outlooks between the ECB and the Fed will dictate price action for the EUR/USD.