EURUSD pulls back ahead of ECB decision 📉

What to expect from today’s ECB decision?

• ECB is expected to deliver 6th consecutive 25 bp rate cut, as the risk of economic stagnation has increased following the introduction of retaliatory tariffs by the U.S.

• This scenario has already been almost fully priced in by swaps, at least for today’s decision.

• The Governing Council may stress that rates are now close to neutral levels, though this does not rule out further cuts should trade policy developments warrant it.

• The bond market is also signaling a decline in Eurozone rates below 2% by the end of 2025.

Energy price deflation paves the way for easing

The latest German PPI data points to a slowdown in one of the main inflationary drivers in the Eurozone: energy prices. In recent months, energy costs were frequently mentioned by ECB officials as the "but" when discussing progress on price stability, justifying their cautious approach to lowering interest rates. However, March data from Germany shows a record drop in energy commodity costs across the board, with energy sector deflation reaching -3.6% YoY and -2.8% MoM.

Eurozone inflation currently hovers slightly above 2%, but this reflects the natural slowdown in monetary policy transmission as the target nears. Source: XTB Research

The money market is pricing in almost three full rate cuts before the end of 2025. Source: Bloomberg Finance L.P.

Euro as a safe haven despite fragile growth

Yesterday’s remarks from Jerome Powell — that the Fed’s dual mandate faces risks from both sides — have effectively dashed hopes of rate cuts in the U.S., while adding more uncertainty to the 2025 economic outlook. Donald Trump’s trade policies have raised concerns about economic performance in both the U.S. and globally, as shown by a series of downward revisions to growth forecasts for major economies.

The Eurozone’s persistent stagnation will thus be tested, but there is growing motivation to actively support competitiveness in the region. Despite the lowered GDP outlook, expectations of fiscal expansion in Germany, continued monetary easing, and Europe’s institutional stability relative to the U.S. are boosting confidence in the euro — which could potentially emerge as a reserve currency alternative to the dollar amid record-high uncertainty.

Source: Bloomberg Economics

Yields on German 2-year bonds have fallen below the symbolic 2% mark, yet the euro is holding onto recent gains despite a hawkish Fed. The reason: a crisis of confidence in the dollar and rising uncertainty about the U.S. economic outlook. Source: XTB Research

EURUSD hits levels not seen since February 2022

The EURUSD pair has broken out to its highest levels since February 2022. Looking at the W1 chart and the RSI indicator, we can see that the recent rally pushed the pair above the 70-point zone — historically a level that often limits further strong upward moves. 

Source: xStation5