The European Central Bank hints at pausing interest rate cuts, and the euro remains stable above 1.1700 against the US dollar.

The euro performed steadily in Asian morning trading, with the EUR/USD exchange rate holding around 1.1710, reflecting investors’ optimism about the EU economy’s outlook. The European Central Bank’s recent policy stance supports this stability — the Governing Council chose to keep interest rates unchanged while sending positive signals to the market about the resilience of the Eurozone economy.

ECB’s Policy Shift

Since June, the European Central Bank has maintained its benchmark interest rate at 2.0%. Last week’s meeting signaled that the easing cycle may be nearing an end, as policymakers raised their economic growth and inflation expectations. ECB President Christine Lagarde stated that there is significant uncertainty and avoided providing specific guidance on future policy directions. This cautious language led traders to infer that interest rates could remain steady at least until June next year.

This policy pause signal has supported the euro. When the market perceives that the cycle of further easing has ended, the related currency typically gains. The resilience of the euro against the dollar partly reflects this shift in expectations.

Diverging Signals from the Federal Reserve

The situation across the Atlantic is more complex. The Federal Reserve implemented a 25 basis point rate cut in December, setting the federal funds target range at 3.50%-3.75%. Fed Chair Jerome Powell indicated that further rate hikes are unlikely in the near term, with the institution adopting a “wait-and-see” stance to assess upcoming economic data.

However, market expectations diverge significantly from the Fed’s official guidance. The Fed’s dot plot suggests only one additional rate cut may be needed by 2026, but traders pricing via the CME FedWatch tool are more aggressive — implying two or more cuts next year. This divergence in expectations could lead to a weaker dollar, which would benefit major currency pairs.

Exchange Rate Outlook and Market Sentiment

Trading volume is expected to remain moderate this week as market participants take profits ahead of the long holiday. This environment may support EUR/USD to continue maintaining stability in the upper range.

Cross-currency pairs like 108 euros versus AUD will also fluctuate with changes in ECB policy stance and dollar liquidity. As the ECB gradually ends its rate-cut cycle while the Fed may continue easing, the attractiveness of European assets will increase.

Fundamentals Driving the Euro

The euro is the official currency of 20 EU member states and has become the second-largest traded currency globally, after the dollar. In 2022, the euro accounted for 31% of total global foreign exchange trading, with an average daily volume exceeding $2.2 trillion. EUR/USD, as the most active currency pair, accounts for about 30% of global trading, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%).

The ECB, as the central bank of the Eurozone, headquartered in Frankfurt, Germany, is responsible for setting interest rates and managing monetary policy. Its core mission is to maintain price stability — achieved by controlling inflation or stimulating economic growth. Interest rates are the primary tool for this goal. Relatively high interest rates — or expectations of higher rates — are usually favorable for the euro, and vice versa.

Key Economic Indicators and Policy Impact

The European Central Bank Governing Council meets eight times a year, comprising central bank governors from Eurozone countries and six permanent members (including ECB President Christine Lagarde), who jointly make monetary policy decisions.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is a key economic indicator for the currency. If inflation accelerates beyond expectations, especially surpassing the ECB’s 2% target, the central bank will be compelled to raise interest rates to regain control. Conversely, higher interest rates are usually favorable for the euro, as they make the Eurozone more attractive to global investors who can park their funds there.

Economic data releases reflect the health of the economy and can directly influence the euro’s movement. GDP, manufacturing and services PMI, employment data, and consumer confidence surveys all impact the currency’s direction. Strong economic performance benefits the euro — attracting more foreign investment and possibly prompting the ECB to raise rates, directly strengthening the euro. Conversely, weak economic data often leads to euro depreciation.

The four major Eurozone economies (Germany, France, Italy, and Spain) are particularly influential, accounting for 75% of the Eurozone’s total economic output.

Trade balance is another important data point for the euro, measuring the difference between a country’s exports and imports during a specific period. If a country’s exports are strong, its currency tends to appreciate due to excess demand from foreign buyers. Therefore, a positive trade balance is favorable for the currency, while a negative balance has the opposite effect.