ECB Set to Ease—Will Lagarde’s Words Give Dollar Bulls the Upper Hand?

ECB Poised to Cut Rates as Growth Concerns Overshadow Inflation Risks

The European Central Bank (ECB) is widely expected to cut interest rates by 25 basis points on Thursday, prioritizing economic weakness over lingering inflationary pressures. With the eurozone economy stagnating and Germany, France, and Italy underperforming, policymakers have little reason to delay easing. Market expectations suggest further rate cuts throughout 2025, potentially totaling 90 basis points.

ECB President Christine Lagarde is unlikely to explicitly commit to additional cuts but is expected to reaffirm that monetary policy remains on an easing path. Despite a rise in inflation to 2.4% in December, easing wage growth, softer labor markets, and subdued oil prices support a dovish stance. The Federal Reserve’s decision to hold rates steady on Wednesday, while signaling a longer pause, is unlikely to deter the ECB from acting.

Market Awaits ECB’s Policy Signal for Further Moves

Traders will be closely watching Lagarde’s tone for any hints about the pace of future cuts. Markets are already pricing in additional reductions in March, April, and June, anticipating a terminal rate near 2%. If Lagarde signals further easing, the euro could face renewed selling pressure, especially after the dollar gained strength following the Fed’s decision.

The euro traded at $1.0425 ahead of the ECB announcement, holding above key support at $1.0380. Dollar bulls are prepared to push the currency lower if the ECB’s stance turns more dovish than expected.

Meanwhile, the U.S. 10-year Treasury yield briefly rose before settling at 4.534%, reflecting ongoing uncertainty about the Fed’s future moves. However, the yield has drifted back to 4.500% early Thursday.

Dollar Reacts as Traders Bet on ECB Divergence

The U.S. dollar is positioned to extend its gains if the ECB reinforces expectations of further rate cuts. The greenback initially jumped after the Fed omitted its previous reference to “progress” on inflation, a move interpreted as slightly hawkish. However, Fed Chair Jerome Powell later reassured markets that rates remain restrictive, keeping bets on U.S. rate cuts intact.

The dollar index hovered around 107.88, showing resilience even after initial volatility. The Fed’s steady stance, contrasted with the ECB’s expected easing, could drive further dollar strength in the near term. Traders are watching for any divergence in policy outlooks, as a more dovish ECB would likely pressure the euro while supporting dollar demand.

Trade War Risks Could Complicate ECB’s Path

A potential trade war with the U.S. poses an additional risk to the ECB’s policy outlook. Former U.S. President Donald Trump’s renewed tariff threats could dampen eurozone growth and force the ECB to extend rate cuts beyond neutral levels. European policymakers are wary of retaliatory measures that could fuel inflation, complicating the central bank’s ability to provide sustained stimulus.

Germany’s industrial sector remains under pressure, and weak consumer demand across the eurozone further supports the case for looser monetary policy. With exports struggling and government spending constrained, the ECB may need to maintain an easing bias to support economic activity.

Market Outlook: Euro Vulnerable as ECB Leans Dovish

If Lagarde strikes a cautious tone and hints at further cuts, the euro could weaken further, potentially testing recent lows. Traders are pricing in a highly accommodative stance, and any deviation from that could lead to volatility.

While the ECB’s expected 25 basis point cut is already factored in, the real market reaction will depend on how strongly Lagarde signals future easing. A dovish outlook could push the euro lower, while any hesitation on additional cuts might offer temporary support. With risks of a trade war and slowing growth, the ECB faces a delicate balancing act in managing policy expectations.

Meanwhile, the dollar remains well-positioned for gains as long as Fed policy remains steady, reinforcing its appeal as a safe-haven asset.

More Information in our Economic Calendar.