EUR/USD: the euro's rallying thrust continues

The euro started on a high note on Monday, strengthening against most of the other major currencies. The EURUSD, EURGBP, EURAUD and EURCAD all traded higher, in stark contrast to how they finished the previous week.

The explanation is that the market is preparing for the ECB's rate decision tomorrow. This is expected to be an important day for Euro traders, as markets officially enter summer trading conditions shortly thereafter.

What has changed since the last ECB meeting?

The euro has consolidated since last month's ECB meeting. The EURUSD is the best example of this: it went above 1.14 one day after last month's meeting and traded between 1.12 and 1.14 over the next 5 weeks.

Other euro pairs followed suit: EURGBP broke through the 0.9 level several times, while the EURAUD found bids in the 1.63 range. What has changed since the last ECB meeting?

What is interesting is that the ECB is expected to keep its monetary policy stable. However, since the last meeting, previous decisions have had time to make their way through the financial markets as the transmission mechanism takes a while before the effects are visible.

The outlook for the euro, an alternative to the USD, has also improved. On the one hand, Europe is perceived to be managing the virus situation better, which is in sharp contrast to what is happening in the United States.

On the other hand, the European Union's recovery fund, currently under discussion, signals a closer step towards greater financial and economic integration. Thus, the prospects for the single currency have strengthened considerably and could lead to a lasting narrowing of peripheral gaps.

It is hoped that an agreement on the EU Recovery Fund will be reached by next month. With no news to counter these expectations, the EUR is expected to find bidders for every drop.

But there is a snag. As every trader knows, the forex is not about one currency, but a pair of currencies. Yes, it's true that the EUR traded higher yesterday against most of the other fiat currencies. But this can change in the blink of an eye, if investors are disappointed by the ECB tomorrow.

So far, all of the major euro pairs have been trading within a strictly defined range since last month's meeting. Will tomorrow's meeting bring the long-awaited breakout?