Euro Strength Underpinned by ECB Decision
- Written by: Gary Howes
Image © European Central Bank
The ECB's next move will be a rate hike, say analysts we follow.
The euro's positive outlook against the euro and pound was reaffirmed today by the European Central Bank (ECB), which left the deposit rate unchanged at 2.00%, having lowered it from 4.0% to 2.0% between June 2024 and June 2025.
The data and upgraded economic forecasts confirmed the central bank's commitment to maintaining rates at current levels for an extended period.
This will bestow support upon the euro, particularly against currencies belonging to central banks that will lower rates in the coming months, namely the pound and dollar.
"Euro-zone rates have already moved higher recently as markets priced out further ECB cuts, providing additional support for the euro. With the BoE and the Fed still expected to lower rates further next year, we forecast continued EUR strength in 2026 while the ECB keeps its policy rate on hold," says a note from MUFG Bank following the decision.
ECB President Christine Lagarde said the decision was unanimous, underscoring the clear consensus on maintaining rates at current levels.
"Following the announcement, EURUSD rose modestly and rates moved slightly higher," says Jeanette Fjære-Lindkjenn, analyst at DNB Carnegie.
Reinforcing the on-hold guidance was the Governing Council's message that all policy options should remain on the table (i.e. there's no lean towards hikes or cuts).
"We maintain our view that the easing cycle has ended and expect the ECB to begin hiking the policy rate in early 2027, a view that today’s message supports," says Fjære-Lindkjenn.
Underscoring the euro-supportive signals from the ECB's final decision of the year were changes to the economic forecasts.
Frankfurt revised up forecasts for both GDP growth and inflation:
GDP growth for 2025 was revised up by 0.2ppt to 1.4%. Growth in 2026 is revised higher 0.2ppt to 1.2% and up 0.1ppt to 1.4% in 2027.
Headline inflation is upgraded by 0.2ppt to 1.9% in 2026, meaning the ECB believes the current level of interest rates are entirely consistent with its mandate to target a 2.0% inflation level.
For 2027, the inflation forecast is lowered slightly to 1.8%.
"These upgrades to both the inflation and GDP growth forecasts, such that the expected undershoot in inflation over 2026 is no longer as pronounced, does reduce the likelihood that further easing in policy will be needed," says Lottie Gosling, analyst at Investec.
