Euro Strength: Why Currency Appreciation Is Not Enough to Change the ECB's Policy

Evercore ISI analysts have presented a new perspective on the relationship between the euro exchange rate and the European Central Bank’s interest rate decisions. According to Jin10, experts indicate that the current strengthening of the euro on global financial markets does not have enough momentum to prompt the ECB to reconsider its rate-cutting stance. Instead, such a significant shift would require a much more serious factor: a substantial decline in inflation expectations caused by weakening consumer demand.

Critical Level: What is Needed for a Strong Euro to Influence Policy

Analysts have identified a specific price target at which the euro’s strength could truly impact regulator decisions. According to their calculations, the euro needs to rise to 1.25 against the US dollar to create enough pressure and compel the ECB to seriously consider lowering rates. Currently, this level remains somewhat distant, indicating limited influence from the current currency appreciation.

Interest Rate Expectations Through 2026

Evercore ISI analysts are constructing a baseline scenario in which the ECB will maintain current interest rate levels throughout the year. However, they note an important asymmetric risk profile: risks are more skewed toward rate cuts rather than hikes. This forecast reflects uncertainty in economic outlooks.

Scenario Developments: From Moderate to Active Measures

The nuances in Evercore ISI’s analysis reveal potential development paths. In the event of excessive euro strength, the ECB might decide on a single rate cut as a restraining measure. However, if broader economic pressures related to further declines in inflation expectations come into play, the central bank could potentially implement two rate cuts within the year. Thus, the strength of economic factors will be decisive in determining the intensity of monetary policy.