Euro extends recovery against dollar amid grim outlook

Euro rose in European trade on Monday against a basket of major rivals, extending recovery for the second day off six-month lows against dollar.

The gains remain rather limited amid grim outlook for the euro's future following the recent European Central Bank's meeting and the hints of reaching neutral interest rates, which threatens to widen the interest rate gap between the US and Europe. 

EUR/USD rose 0.2% to 1.0677, with a session-low at 1.0658, after rising 0.2% on Friday, the first profit in three days, off six-month lows at 1.0632. 

Euro lost 0.4% last week, the ninth weekly loss in a row and the longest such streak of weekly losses in euro's history. 

ECB

Unexpectedly, the European Central Bank raised interest rates last week for the tenth meeting in a row, carrying on its battle against inflation.

The ECB raised interest rates by 25 basis points to 4.50%, the highest since 2001.

The ECB said at its policy press release that despite slowing inflation, it'll remain high for an extended duration.

The central bank asserted that upcoming decisions will rely heavily on data to decide the appropriate level and duration of high interest rates.

ECB President Christine Lagarde said that ECB members believes the current rates will help control inflation and bring it back to 2%.

The ECB will continue to rely on data to determine the duration of the currently high interest rates.

The ECB cut growth forecasts this year from 0.9% to 0.7%, but expects the euro zone economy to rebound in the second half of the year.

Interest Rate Gap

The current interest rate gap between the US and the euro zone currently stands at 100 basis points, the lowest since May 2022 and is expected to remain so until November, when the ECB is expected to maintain interest rates unchanged.

However there's a nearly 50% chance the Federal Reserve will raise interest rates by 25 basis points, in turn widening the gap with European policies.