The ECB is about to cut interest rates. Can the euro exchange rate continue its strength?

On June 5th, the European Central Bank’s interest rate decision is about to be announced, and the market’s focus has already shifted—what is the outlook for the euro exchange rate in this new cycle of rate cuts?

Rate Cut Expectations Are Settled, Inflation Data Supports Policy Shift

According to the latest publicly available data, the harmonized CPI year-on-year preliminary figure for the Eurozone in May reached 1.9%, hitting an eight-month low and falling below the ECB’s 2% target for the first time. This signal is sufficient to support market expectations of central bank action—most analysts have already confirmed that the ECB will announce a 25 basis point rate cut at this meeting, reducing the deposit rate from the current 2.25% to 2%.

Notably, the ECB has implemented seven rate cuts over the past year. LSEG data shows that the market has fully priced in a 25 basis point rate cut on June 5th, and it is also expected that at least one more rate cut will occur before the end of the year, with deposit rates possibly stabilizing around 1.75%.

Rate Cuts Are Difficult to Reverse the Euro’s Strong Momentum

Although consecutive rate cuts typically weaken a country’s currency, market analysis suggests that the euro’s exchange rate will not follow traditional logic entirely. According to YuXin Bank, because the US dollar is generally in a relatively weak phase, even if the ECB begins a rate-cut cycle, the euro is unlikely to depreciate significantly. On the contrary, the dollar’s weakness may actually serve as a support for the euro.

From a technical perspective, the EUR/USD exchange rate is expected to remain within a range of 1.10-1.15 USD with oscillations. Strategists indicate that the market has already priced in further rate cuts, meaning the risk of additional rate reductions has largely been factored in. In such an environment, investors tend to buy on dips, effectively limiting the euro’s downside.

US Dollar Movements Are a Key Variable, Euro Outlook Depends on Bilateral Factors

Danske Bank analysts believe that whether the dollar can regain market support depends critically on whether US economic data shows significant improvement. Until the economic fundamentals improve, the EUR/USD is expected to continue its upward trend.

Overall, although the ECB is about to enter a cycle of rate cuts, a simple reduction in interest rates is unlikely to completely change the upward trajectory of the euro exchange rate. The real determinants will be the relative strength comparison between the US and European economies, as well as the ongoing impact of Trump’s trade policies on the global economic outlook. For investors focused on euro exchange rate forecasts, the key is to closely monitor US economic developments and monetary policy signals.