Euro Softens to $1.17 as Markets Eye Interest Rate Outlook

The euro hovered around $1.18 at the start of February, just below an over four-year peak of $1.20 touched last week. Markets are widely expecting the European Central Bank to keep interest rates unchanged on Thursday, mirroring the Federal Reserve’s latest decision, as policymakers assess the impact of a weaker US dollar and a wave of low-priced Chinese imports on the inflation outlook. The ECB has kept monetary policy steady since June, and investors do not anticipate meaningful changes in the coming months, as the eurozone economy shows signs of resilience and inflation remains close to target. While officials say policy is in a “good place,” risks are building on the horizon. Last week, ECB policymaker Martin Kocher warned that further euro strength could push the central bank to resume rate cuts. Meanwhile, his colleague François Villeroy de Galhau said the dollar’s recent depreciation is among the key factors shaping the ECB’s policy stance going forward.

The euro settled at $1.19 at the end of January, close to a four-year high and marking a 1.5% gain over the month, supported by broad dollar weakness as investors digested a series of economic and policy developments. The US dollar came under pressure amid ongoing policy uncertainty in Washington, including renewed tariff threats by Trump, criticism of the Fed’s independence, worries over a potential government shutdown, and the president’s remark that he was unconcerned about the dollar’s recent decline. Economic data also bolstered the euro. The Eurozone economy expanded 0.3% quarter-on-quarter in Q4 2025, matching the previous quarter and slightly above the 0.2% market expectation, with Spain, Germany, and Italy all exceeding forecasts. Meanwhile, the ECB Consumer Expectations Survey showed that expectations for three and five years ahead accelerated. Earlier, ECB policymaker Martin Kocher warned that further euro strength could prompt the central bank to resume interest-rate cuts.

The euro fell to $1.19, retreating from near June 2021 highs touched earlier in the week, as a stronger dollar weighed on the currency after comments from US Treasury Secretary Scott Bessent reduced expectations of US intervention in foreign-exchange markets. Meanwhile, the Federal Reserve left interest rates unchanged, as expected, with Chair Powell signalling that rates are likely to remain on hold for some time. In Europe, ECB policymaker Martin Kocher warned that further euro strength could prompt the central bank to resume interest-rate cuts. Markets modestly increased expectations for a summer policy move, with the implied probability of a July rate cut rising to around 25% from roughly 15% previously. The ECB is set to decide on monetary policy next week and is widely expected to keep rates unchanged. The Euro Area economy grew by 0.3% in the third quarter of 2025, while inflation eased to 1.9% in December.