Euro-to-Dollar: ECB Reluctance & U.S. Inflation Trigger Bids

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Today's events confirm thea clear-cut divergence between U.S. and European interest rate policy required to deliver more euro gains.

The European Central Bank (ECB) left interest rates unchanged and indicated limited prospects for further interest rate cuts, while the Federal Reserve was given the green light to deliver a number of reductions in the coming months in the wake of a benign inflation print.

The divergence in policy creates a compelling fundamental narrative for a stronger Euro to Dollar exchange rate (EUR/USD), and the pair rose 0.35%.

The ECB offered no indication that further rate cuts were required, a message that shored up short-term European bond yields and the euro. It raised its growth forecast for the current year to 1.2% from 0.9%, which was probably the single strongest signal that it thought the economy didn't require lower rates.

"More interest rate cuts would only be on the agenda in the event of significant economic weakness based on lower private demand. This cannot be deduced at present. Key leading economic indicators are pointing to a moderate recovery. If this remains the case, interest rate hikes can be expected again in the medium term," says Dr. Thomas Gitzel, Chief Economist at VP Bank.

The dollar meanwhile softened across the board after U.S. inflation met analyst expectations, signalling the all-clear for the Federal Reserve to cut interest rates next week.

U.S. headline CPI inflation rose to 2.9% year-on-year, which met expectations. Core CPI, which the Federal Reserve pays close attention to, was steady at 3.1%, which also matched expectations.

"The Federal reserve having been in wait and see mode since December 2024 has been given the green light today to cut rates. Inflation has not seen large upside surprises from tariff turmoil and with recent revisions to jobs data showing almost 1 million fewer jobs than previously thought, the Fed’s dual mandate will ensure rates are cut at next weeks meeting," says Isaac Stell, Investment Manager at Wealth Club.

With interest rate policy diverging, the difference in U.S. and Eurozone bond yields should shrink further, which creates a favourable backdrop for the euro to advance against the dollar.