EUR/USD appreciated for a fourth day by 0.1% to 1.1770 overnight, retracing more than 75% of its decline to 1.1555 from 1.1830 over July 1-17. The market is overwhelmingly in favour of the European Central Bank holding rates at today’s governing council meeting. The ECB has cut rates eight times since June 2024, halving the deposit facility rate to 2% last month, at the mid-point of its 1.75-2.25% neutral range. ECB President Christine Lagarde will likely reiterate the June framework, which stated that decisions will be “meeting-by-meeting” and guided by incoming data.
However, Lagarde’s tone should be more balanced than in June because of the elevated focus on the US-EU trade talks ahead of the August 1 deadline for higher tariffs and a stronger EUR/USD above the 1.1445 level seen at the June 5 meeting. Hence, markets will be watching for nuanced hints to affirm or negate the OIS pricing for a 40-50% chance of a September cut.
Lagarde will reiterate that the ECB does not target exchange rates but may consider her colleagues’ concern about the EUR’s 14% YTD appreciation this year. Given the Trump administration’s push back on the USD de-dollarization narrative, she will want to avoid a currency rivalry narrative in her support for a larger global role for the EUR, at a sensitive time of ongoing US-EU trade negotiations. ECB officials Luis de Guindos (Italy) and Francois Villeroy de Galhau (France) have flagged 1.20 as a key level that could stifle exports and push inflation below target.
In our view, the EUR ‘s recent appreciation had been more about USD vulnerability rather than Eurozone resilience, driven by Trump’s threats to undermine the Fed’s independence with his intensifying pressure for Fed Chair Jerome Powell to resign and push for sharply lower US interest rates of 1% (below the 2% ECB rate). Hence, next week’s FOMC meeting will likely matter more to the EUR than today’s ECB meeting. Barring surprises, EUR/USD should stay within its month-long range of 1.16-1.18.
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July 24 in history
In 1959, US Vice President Richard Nixon argued with Soviet leader Nikita Khrushchev in Moscow, known as the "Kitchen Debate".
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