The euro against the US dollar faces multiple tests, with expectations of central bank interest rate cuts emerging

U.S. employment data fluctuations have drawn market attention, with financial analysis institutions generally focusing on the future trend of the euro against the dollar. Francesco Pessole, an analyst at ING, recently stated that exchange rate movements are highly correlated with central bank policy risks, and the market needs to closely monitor key thresholds of the exchange rate level.

Exchange Rate Breakthroughs Trigger Policy Signals, Rate Cut Risks Rise

When the euro against the dollar surpasses the 1.20 level, an important turning point will be observed. Pessole pointed out that at this level, some European Central Bank officials may signal the possibility of another rate cut, indicating subtle changes in the interest rate decision environment. The relative weakness of the dollar is the main driver behind the euro’s appreciation, and this exchange rate pressure is gradually changing the central bank’s policy approach.

1.25 Becomes a Watershed for Inflation Expectations

However, to meaningfully lower inflation expectations, market analysis suggests that the euro against the dollar needs to rise further to the 1.25 level. This higher threshold represents a substantial strengthening of rate cut expectations. Only at this higher level can the central bank support a more aggressive downward revision of price trends, laying the foundation for subsequent policy adjustments. Pessole’s judgment indicates a clear quantitative relationship between the exchange rate and inflation expectations.

Verbal Interventions Have Limited Effect, Exchange Rate’s Own Momentum Takes the Lead

It is worth noting that, in the context of dollar-driven exchange rate movements, purely verbal policy statements have limited effectiveness. Pessole believes that sporadic exchange rate comments and interventions are insufficient to effectively curb euro appreciation. Market actual trading and fundamental factors are becoming the main forces determining the exchange rate direction. This suggests that traditional policy communication tools are clearly inadequate in the face of strong dollar pressure, and central banks may need to rely more on actual policy actions rather than verbal statements.

Under current market conditions, the trend of the euro against the dollar has become an important window to observe the European Central Bank’s policy space, and the exchange rate level will directly influence the pace of the central bank’s decisions.