The euro was steady on Friday but still looked set to end the week on a high after the European Central Bank raised its main lending rate again on Thursday.

The decision was widely expected given the recalcitrance of inflation in the euro zone, as ECB President Christine Lagarde predicted another rate hike could come as early as next month. In the euro zone, as elsewhere, the assessment that inflation has been "too high for too long" is widely shared, she said. An upward revision to the ECB's inflation forecast underscored her point. Forecasts updated on Thursday put annualized price growth at 5.4 percent this year, up 0.1 percentage points from the March forecast. Forecasts for the next two years were also revised up by the same amount.

EUR/USD surged to a five-week high after the decision but failed to make further gains during Friday's Asian and European sessions. Still, for now the ECB remains very aggressive in tightening monetary policy, while the Fed has opted to pause its long-term rate hikes to gauge their impact, although it generally expects to continue raising them in due course.

Of course, the Fed is further ahead of the inflation-defying curve than the ECB, and it is arguable that its monetary policy is more effective. Regardless, the euro is currently drawing considerable support from the prospect of rate hikes.

It's worth noting that the market is very close to pricing in another U.S. rate hike next month, so euro bulls need to remain vigilant as economic data rolls in. There are some this afternoon, closely watched consumer sentiment surveys in the form of the University of Michigan. However, that in itself may not be enough to dent a bumper week for the euro.

EUR/USD Technical Analysis

EUR/USD's surge on Thursday took it further above an already sharply ascending uptrend line from the June and 7 lows and pushed it back to the May 11 closing low of 1.09124 and the May 3 closing lows. The trading range is bounded by the closing high of 1.10613. The latter is a nearly 15-month peak.

Clearly, the bulls could be getting a little ahead of themselves, both technically and fundamentally. However, it will be interesting to see if the euro can hold within that range until the end of the week. If anything, the bulls may be building a solid enough base to see the recent highs challenged again, possibly next week.

There is clear psychological support at the 1.09 handle, but this is very close to the current market. Between 15-17 May, the 1.0860 area should hold support below here, and if they give way, trendline support is at 1.08214.

IG's own sentiment index found traders were somewhat cautious about further gains from here, with 63% of them net short. This may indicate that there is nothing more serious than some possible overbought, and the relative strength indicator will confirm this. But those who haven't committed may want to wait a bit to see if this week's gains hold.