Euro to benefit from rate hikes

The EUR/USD pair builds on this week's breakout momentum through the previous YTD peak and climbs to its highest level since February 2022, around the 1.1240-1.1245 region during the Asian session on Friday.

The US Dollar (USD) downward trajectory remains uninterrupted for the seventh straight day in the wake of expectations that the Federal Reserve (Fed) will soon end its policy-tightening cycle. In fact, investors now seem convinced that the US central bank will keep rates steady for the rest of the year after the widely anticipated 25 lift-off in July. This led to the recent sharp decline in the US Treasury bond yields and drags the USD to a fresh 15-month low, which, in turn, is seen as a key factor acting as a tailwind for the EUR/USD pair.

In contrast, the minutes of the European Central Bank (ECB) meeting held in June revealed that policymakers remain determined to continue the current hiking cycle beyond July to bring inflation back to target. It is worth recalling that the ECB, in its June economic projections, forecasted that inflation would stay above its 2% target through the end of 2025. This hawkish outlook, to a larger extent, offsets emerging signs of a cooling economy and continues to underpin the shared currency, further lending support to the EUR/USD pair.

That said, the Relative Strength Index (RSI) on the daily chart is already flashing overbought conditions and might hold back bulls from placing fresh bets around the major. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the EUR/USD pair is to the upside and any meaningful corrective decline might still be seen as a buying opportunity.