Euro rises near 3-year high ahead of ECB rate decision

• ECB signals likely pause after 8 rate cuts
• Inflation seen below 2% through 2026
• Euro tops $1.17 on trade optimism
• Markets eye July ECB decision, PMI data
• One more ECB cut likely by December

The European Central Bank (ECB) delivered its eighth consecutive interest rate cut at its June 3–5 meeting, aiming to anchor inflation expectations and prevent unintended tightening in financial conditions. Policymakers cited "highly uncertain" global conditions, including persistent trade tensions that may intensify. Amid this backdrop, they emphasized maintaining flexibility and avoiding firm forward guidance.

A July pause now appears likely, with most officials favoring a wait-and-see approach until more data and clarity on global trade talks emerge. Inflation is forecast to fall below the ECB’s 2% target later this year and remain subdued into 2026, driven by a strong euro, declining energy prices, and cheaper imports from China. Markets expect just one more rate cut in 2025.

Meanwhile, the euro traded above $1.17, hovering near its highest level since August 2021. Optimism over a potential US–EU trade agreement grew following the announcement of a US–Japan deal, though caution remains high ahead of renewed tariff negotiations. Reports suggest the EU is preparing countermeasures if talks stall before the August 1 deadline.

Markets are also eyeing Thursday’s ECB policy decision and flash PMI releases from major eurozone economies. The ECB is widely expected to hold rates steady, balancing the impact of a strong euro and looming US tariffs on inflation and growth. Money markets are fully pricing in a 25-basis point cut by December.