Euro Advances as ECB Nears the End of the Cutting Road

File image of ECB President Christine Lagarde. Photo by Sanziana Perju / European Central Bank.

Euro exchange rates were higher after the ECB said this might just be the final interest rate cut.

European Central Bank (ECB) President Christine Lagarde said the central bank was close to ending the current phase of interest rate cuts following today's decision to lower the main policy rate by 25 basis points.

She said rates in the EU were "well positioned" now that they had been lowered to 2.0%, in what amounts to an admission further rate cuts are increasingly unlikely.

Lagarde added that "we are in a good place."

"It's becoming less certain on 1.75% here, given Lagarde's comments," says Claus Vistesen, an economist at Pantheon Macroeconomics, referencing the odds of another 25bp cut.

The Euro-to-Dollar exchange rate proved relatively unfazed after the ECB cut rates and announced it had lowered forecasts for both inflation and economic growth.

However, the admission by Lagarde during the press conference seems to have woken investors, with money markets abruptly lowering the chances of further cuts. In fact, swaps prices show just one more 25bp cut is priced for year-end.

EUR/USD rose to 1.1476, putting it on course to hit the 1.15 level in short order. The Euro-Pound exchange rate extended higher to register a daily gain of 0.13%, having reached 0.8436. (Pound-Euro rate is now down to 1.1852).

"The Euro is moving higher on a combination of softer U.S. data - jobless claims rose sharply - and these surprisingly frank comments from Lagarde," says Russell Gous, Editor-In-Chief of TopMoneyCompare.co.uk. "The Euro really is looking well poised to extend its 2025 rally from here."

Above: Eurozone inflation is forecast to fall below 2.0%.

Interestingly, one member of the ECB Governing Council voted to maintain rates, which is unusual given that most decisions are unanimous. The dissent would indicate that further rate cuts will face increasing resistance.

However, some analysts say falling inflation and an economy that is not yet running at full potential create ample space for the central bank to cut further.

"The comments in the press conference suggested that the Council considers it is nearing the end of its rate cut cycle. However, we think that further interest rate cuts are still likely. Indeed, we maintain the view that the ECB will cut policy rates further, with the deposit rate reaching 1.5% by September," says Nick Kounis, an economist at ABN AMRO.

Two more cuts by September imply market pricing will need to shift in a direction that would traditionally result in a weaker Euro. However, analysts note the Euro is less inclined to follow relative interest rate developments than has been in the past.

Instead, a rerouting of investor capital into Europe and waning confidence in the Dollar are judged to be potent sources of support for the single currency.

"We think further euro strength is likely given the overvaluation of the dollar and indeed the ECB’s more hawkish tone in the press conference could encourage such a trend," says Kounis.