Euro Strengthens as Weak US Data Fuels Fed Rate Cut Bets

The euro traded around $1.18, after the European Central Bank left interest rates unchanged as expected. The ECB reiterated that inflation is expected to stabilize at its 2% target over the medium term, while noting that the euro area economy remains resilient despite an uncertain outlook driven by global trade policy risks and ongoing geopolitical tensions. At the ECB press conference, President Lagarde said the euro area inflation outlook remains in a “good place,” and downplayed the recent euro rally while warning that data may be volatile in the coming months and should not drive policy decisions in isolation. She added that uncertainty is elevated due to a volatile global policy environment. Separately, Eurostat data showed headline inflation eased to 1.7% yoy in January, matching expectations and marking the lowest reading since September 2024. Core inflation also slowed to 2.2%, slightly below forecasts and the weakest since October 2021.

The euro slipped just below $1.18, retreating from last week’s more than four-year high of $1.20, as investors awaited the ECB’s policy decision later today. Markets widely expect rates to remain unchanged, with policymakers weighing the impact of recent euro strength and low-priced Chinese imports on the inflation outlook. The ECB has held policy steady since June, describing its stance as being in a “good place,” though some officials have warned that further currency appreciation could prompt a resumption of rate cuts. Eurostat data showed headline inflation eased to 1.7% year-on-year in January, in line with expectations and the lowest since September 2024, while core inflation fell to 2.2%, slightly below forecasts and its weakest reading since October 2021. Meanwhile, the dollar hovered near a two-week high as investors scaled back expectations for aggressive Federal Reserve rate cuts.

The euro held near $1.18, below last week’s more than four-year high of $1.20, as investors digested January’s Eurozone CPI data ahead of Thursday’s ECB policy decision. EUROSTAT figures showed headline inflation eased to 1.7% year-on-year, in line with expectations and the lowest since September 2024, while core inflation fell to 2.2%, slightly below forecasts and its lowest since October 2021. Markets widely expect the ECB to keep interest rates unchanged, as policymakers weigh the impact of a stronger euro and low-priced Chinese imports on the inflation outlook. The central bank has held policy steady since June, with officials describing it as being in a “good place,” though some warned that further euro strength could prompt a resumption of rate cuts.