German Stimulus Lifts Euro, Lagarde Cautions on ECB’s Next Move

EUR/USD Surges as German Stimulus Triggers Rally Before ECB Cut

The euro rallied sharply this week, breaking key resistance levels, as Germany’s massive stimulus plan drove bond yields higher and fueled investor confidence. The European Central Bank’s (ECB) rate cut followed the market shift, but the key driver was Germany’s decision to loosen fiscal constraints and inject stimulus into the economy.

While traders initially expected the ECB’s dovish stance to weigh on the euro, the stimulus-fueled bond sell-off changed the outlook, pushing EUR/USD above both the 50-day and 200-day moving averages.

German Stimulus Sparks Euro Surge

Germany’s fiscal expansion—aimed at boosting military and infrastructure spending—triggered a bond market sell-off, with 10-year German yields surging to their highest level since October 2023. This rise in borrowing costs spilled over into other European bond markets, reinforcing expectations that fiscal policy, not just ECB easing, will shape the eurozone’s economic trajectory.

The impact on EUR/USD was immediate. Traders anticipating higher growth and inflation from fiscal stimulus shifted away from the euro’s bearish outlook, leading to a decisive breakout above the 1.0725 resistance level. The ECB’s rate cut to 2.5% from 2.75% followed, but by that point, the market had already adjusted to the shifting fiscal landscape.

Rate Cut and Trade Risks Add Complexity

Despite the euro’s rally, risks remain. The ECB lowered growth forecasts to 0.9% for 2025, citing trade uncertainty and weak investment. The potential for a 25% tariff on EU exports from a Trump-led U.S. administration could weigh on European manufacturing, weakening economic momentum.

ECB President Christine Lagarde has also warned that rising energy prices could delay inflation’s return to 2%, limiting the ECB’s room for further cuts.

Technical Outlook: EUR/USD Breaks Key Levels

EUR/USD’s breakout above the 200-day SMA (1.07257) is a strong bullish signal, suggesting momentum could continue. However, traders will be watching for confirmation, as a pullback toward 1.0725 could test the strength of the move. If the euro sustains its gains above this level, the next resistance zone lies around 1.0850–1.0900.

Market Outlook: Euro Gains, But Risks Loom

Germany’s stimulus has provided short-term support for the euro, offsetting the ECB’s dovish stance. However, risks remain, with potential trade wars and energy price volatility threatening sentiment. Traders should monitor bond market movements, fiscal policy updates, and U.S. trade developments for further direction.

For now, EUR/USD remains in bullish territory, but further upside will depend on how markets react to ongoing fiscal and trade developments.

More Information in our Economic Calendar.