Euro Trades Strong after Rates Decision Diverge
The euro (EURUSD) hovered around $1.18 with a small gain against the US dollar in 2025, reflecting diverging policy paths between the European Central Bank and the Federal Reserve.
Investors continue to accumulate the single currency as markets await the U.S. and European interest rates policy for 2026, which could stay over the short term early in 2026.
The euro’s positive outlook against the pound was reaffirmed by the European Central Bank (ECB), which left the deposit rate unchanged at 2.00%, having lowered it from 4.0% to 2.0% between June 2024 and June 2025.
The data and upgraded economic forecasts confirmed the central bank’s commitment to maintaining rates at current levels for an extended period.
This will bestow support upon the euro, particularly against currencies belonging to central banks that will lower rates in the coming months, namely the pound and dollar.
The monetary authority signalled possible tightening for some time, with President Christine Lagarde noting the high uncertainty makes forward guidance on future rate moves difficult.
In the US, markets are preparing for President Donald Trump to nominate a new Fed chair to replace Jerome Powell when his term ends in May, potentially favouring lower rates.
For third time in 2025, US Federal Reserve reduced interest rate by 25 basis points at its December meeting to 3.50%-3.75%, completing a cumulative 75 bps of cuts in 2025 amid a cooling labor market and moderately elevated inflation.
ECB Governing Council member Yannis Stournaras on Sunday said that interest rates would remain appropriate as they now stand unless a major shock occurred.
Stournaras, who heads the Bank of Greece, said 2026 would be starting with “optimism regarding the course of inflation in the euro area,” given inflation seen converging towards price stability and a smooth landing of the economy.
‘The latest data show that we are on the right track: forecasts confirm that inflation in the euro area is close to the 2% target over the medium term, while growth remains resilient despite high uncertainty.
“Euro-zone rates have already moved higher recently as markets priced out further ECB cuts, providing additional support for the euro.
With the Bank of England and the Fed still expected to lower rates further next year, we forecast continued EUR strength in 2026 while the ECB keeps its policy rate on hold,” says a note from MUFG Bank following the decision. Otedola Sells Geregu Power after 1,041.50% Gain in 3 Years
