The ECB holds its press conference in Frankfurt on the 5th of June, 2025 in Frankfurt am Main. © Maria Rita Quitadamo/ECB.
"A more robust EUR recovery narrative remains in place."
The Euro is well placed to advance through the second half of the year now that the European Central Bank (ECB) has indicated it might have finished cutting interest rates.
This was communicated by the ECB at its June policy meeting, an event that wasn't expected to cause any ripples in global markets.
The central bank cut interest rates by 25 basis points to 2.0% and released new economic forecasts. However, President Christine Lagarde delivered one of the more memorable press conferences of her tenure, giving markets something to bite into.
She was more forthright than usual, saying the ECB had "nearly concluded" the run of interest rate cuts of the current cycle of falling rates.
This "supports our positive EUR bias," says Jeremy Stretch, Chief International Strategist at CIBC.
Lagarde said rates in the EU were "well positioned" now that they had been lowered to 2.0%, adding that "we are in a good place."
A pause in the rate-cutting cycle will allow other central banks that continue to cut to close an interest rate differential that has historically weighed on the Euro.
"Lagarde’s comments were interpreted as hawkish, and expectations for further ECB rate cuts have retreated slightly, with slightly less than one more cut priced in by year-end," says Kjersti Haugland, analyst at DNB Carnegie. "We expect the ECB to pause in July and deliver a final rate cut in September, leaving the deposit rate at 1.75% for the remainder of 2025 and throughout 2026."
Above: GBP/EUR at daily intervals, with Monday's Week Ahead Forecast annotations. The prediction is spot-on. But, our anticipation for a move higher in the coming days is challenged by the ECB's surprisingly hawkish stance.
The ECB's desire to halt cutting comes as the EUR finds demand from global diversification trends away from the U.S. and the Dollar.
Lee Hardman, an analyst at MUFG, says his team is "comfortable" with expectations for the Euro "to strengthen further."
Germany's ECB Governing Council member, Madis Muller, confirmed on Friday that "we have almost finished the rate-reduction cycle this time around."
Bank of France Governor Francois Villeroy de Galhau also backed the stance, saying "We have won the battles against inflation,” he told France 2 television. "We had already won it in France with inflation below 1% today. For Europe it's 1.9% and we forecast 2% this year."
The Euro rose 0.10% against the Pound on the day, but advanced to its highest level since April 22 against the Dollar.
Above: EUR strength is most obvious against the Dollar.
To be sure, central monetary policy is not the biggest game in town for foreign currencies, as we deal with significant tariff risks and U.S. policy uncertainty.
A rerouting of investor capital into Europe and waning confidence in the Dollar are judged to be potent sources of support for the single currency.
"We think further euro strength is likely given the overvaluation of the dollar and indeed the ECB’s more hawkish tone in the press conference could encourage such a trend," says Nick Kounis, an economist at ABN AMRO.
"Ongoing appetite for global reserve diversification, via appetite for eurozone bonds, (including EU peripheral bonds) and particularly stocks, provides a constructive policy backdrop. Consequently, we continue to anticipate a return towards year-to-date highs at 1.1573 into H2," says CIBC's Stretech.
"We remain comfortable with our outlook for EUR/USD to strengthen further up towards the 1.2000-level," says MUFG's Hardman.
Chris Turner, head of FX research at ING, says the euro is continuing to benefit from being the most liquid alternative to the dollar. There is also evidence that portfolio re-allocation is helping the euro.
"Earlier this week, March eurozone Balance of Payments data showed that eurozone residents repatriated EUR40bn of foreign equity positions in March—the largest inflow since September 2022. And the equity portfolio flow account looks pretty healthy for the euro right now," says Turner.