Euro Drops to 2-Week Low amidst ECB Rates Cut
The euro dropped below $1.038, hitting a two-week low amidst European Central Bank (ECB) rate cuts and weak economic data. The ECB dropped its benchmark interest rates by another 25 basis points to 2.75%, and the accompanying communication fully matched expectations.
The Governing Council retained a meeting-by-meeting, data-dependent approach but also reaffirmed its dovish bias on the back of optimistic disinflation expectations and a grim growth outlook, ING analyst Francesco Pesole said.
Unlike the Bank of Canada, which on Wednesday had strictly tied future cuts to US trade policy, the ECB seems to be heading to lower rates regardless of Trump’s tariff plans.
Germany’s unemployment rate ticked higher in January, reflecting ongoing struggles in Europe’s largest economy. Meanwhile, French inflation rose slightly less than expected, and German state data also pointed to easing price pressures.
In response, money markets adjusted their expectations, pricing in a deposit rate of 1.93% by December 2025, down from 2.05% before the data release.
This comes just a day after the ECB cut rates for the fourth consecutive meeting, reaffirming confidence in the disinflation process despite persistent pressures in the services sector.
The most interesting development was probably the leak to the media that the Governing Council will drop the “restrictive” reference to interest rates when it cuts rates again in March, according to ING.
For now, the ECB in-meeting and out-meeting communication has simply been too dovish to justify a rethink of dovish expectations.
“What could tilt ECB pricing is, however, data. Today, France and Germany see January’s flash CPI estimates, and consensus is for a reacceleration to 1.5% in France and a flattening to 2.6% in Germany.
Pesole stated that details about core components should attract additional interest, although we’d probably need to see a substantial upward surprise to drive the euro materially higher given President Christine Lagarde reiterated tolerance for moderate inflation oscillations in the first half of the year.
President Donald Trump said the US is slapping a 25% tariff on Mexico and Canada, effective Saturday, February 1. The news didn’t sound good to euro buyers, who are now anticipating Trump to target the Eurozone.
EUR/USD is expected to follow the tariff-driven swings in the dollar. Should Trump impose tariffs on Canada and Mexico by Friday, ING thinks EUR/USD can easily head below 1.030 on the back of USD strength, and greater tariff risk could be embedded into the euro.
