Even with the euro's sharp rise, the issue of caution remains unresolved, and the ECB is expected to keep interest rates unchanged.

Evercore ISI analysts have highlighted some points of caution. They believe that recent gains in the euro are unlikely to significantly influence the ECB’s (European Central Bank) decision to cut interest rates. The analysts note that a mere appreciation of the currency is insufficient to prompt a shift in monetary policy; instead, more structural improvements in economic conditions are necessary.

Euro surpassing $1.25—Market hurdles to clear

Specifically, it is suggested that the euro needs to rise against the dollar to above $1.25. However, this level is only enough to exert sufficient pressure for the ECB management to seriously consider lowering interest rates. In other words, the strength of the currency alone makes it difficult to justify a policy change, according to the analysts.

Significant decline in inflation expectations as a key factor for caution

More important is the trend in inflation expectations driven by weakening demand. Only when deflationary pressures become prominent due to deteriorating supply and demand balance will the ECB be more likely to be forced into a policy shift. The analysts believe that unless such a scenario materializes, the current interest rate levels are likely to be maintained throughout 2026.

Risk assessment and multiple policy scenarios

However, the analysts do not overlook risk factors. They explicitly point out that risks are skewed toward rate cuts. If the euro’s strength becomes excessive, the ECB might choose to cut interest rates once on its own. Furthermore, if broad downward pressure on inflation exists simultaneously, there is also a possibility that the central bank could implement two rate cuts. The existence of these multiple scenarios serves as a warning to market participants.

Given the high uncertainty surrounding policy decisions, close attention must be paid to the interaction between currency and interest rate markets. The euro’s movements will continue to serve as an important indicator for the ECB’s policy judgments, extending beyond mere currency issues.