The EUR/USD pair has been consistently rallying since the end of last week, while other major currency pairs have been fluctuating amid global financial instability.

The EUR/USD pair rose, approaching the 1.0800 level in early European trading on Wednesday (March 22), reaching its highest level since mid-February. There were two reasons behind the euro's strength: the hawkish stance of the ECB and the turbulence in interest rate expectations.

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EUR/USD Daily chart via TradingView

Last week, the European Central Bank (ECB) raised interest rates by 50 basis points while affirming its intention to raise them further in the coming months to combat inflation. However, the rate hike meeting was held just one day after the Credit Suisse crisis surfaced.

The market appreciated the ECB's hawkish stance by pushing the euro's exchange rate higher in various currency pairs. Moreover, ECB officials have expressed hawkish rhetoric tirelessly on various occasions.

Head of the Bundesbank, Joachim Nagel, said to The Financial Times yesterday that the battle against inflation is not yet over. He emphasized that inflation pressures are still strong and widespread in the economy.

While ECB officials persistently provide hawkish assurances to the public, market participants question their expectations of The Fed's interest rate. This situation benefits the euro, which usually acts as a "funding currency" meaning it is sold in carry trade transactions.

"From a technical perspective, EURUSD remains at 6-week highs with the 1.0800 key to further gains. The 1.0800 level served as support at the end of January and provided strong resistance in February as EURUSD attempted to break higher. The path of least resistance does appear to be the upside at present," quoted Zain Vawda from DailyFX.

"Given the hawkish rhetoric from ECB President Christine Lagarde and the 50bps hike last week a increase of 25bps from the Federal Reserve may provide a temporary reprieve for the US Dollar today. However, should we get a dovish outlook and economic projections for the Fed Chair we could very well break higher with the 1.0920 and then potentially 1.1000 psychological level coming into focus."

Next, euro traders not only need to monitor the announcement from the FOMC meeting of the Fed but also from the Swiss National Bank and the Bank of England. Their decisions on respective interest rates can significantly impact the euro exchange rate, as all three represent the three counter currencies with the largest trading volume against the single currency in the international market.