Lagarde Stays Cautious After ECB Rate Cut, EUR/USD Faces Pressure from Trade Risks

ECB Cuts Rates Again – But Is a Pause on the Table?

The European Central Bank delivered a widely expected 25 basis point rate cut on Thursday, bringing its deposit rate to 2.0%. While inflation has retreated to the ECB’s 2% target, and growth concerns mount, the central bank offered no forward guidance, opting instead for a “meeting-by-meeting” stance. Traders are now focused on whether July will mark a pause in what has been the most aggressive rate-cutting cycle since the 2008 financial crisis.

Lagarde Offers Cautious Optimism as Eurozone Enters ‘Neutral’ Rate Zone

With the deposit rate now at a level seen as neither stimulating nor restricting growth, ECB President Christine Lagarde emphasized that the current stance provides flexibility. She signaled no commitment to further easing, stating the ECB is “in a good position” to face uncertainty. The decision to cut was nearly unanimous, with only one dissenting voice among Governing Council members.

The ECB also downgraded its 2026 inflation outlook, citing weaker near-term economic prospects and persistent global trade risks. Services inflation, previously stubborn, has cooled significantly. Still, Lagarde pointed to bolstering factors such as increased EU defense and infrastructure spending that could support medium-term growth.

U.S. Trade Policy Poses Risk to Eurozone Growth

Concerns over U.S. trade tariffs weighed heavily on the ECB’s forward assessment. Trump’s renewed protectionist stance is expected to hit euro area exports and dampen business investment. While manufacturing has seen short-term gains from stockpiling, services activity is slowing. Lagarde acknowledged these risks, adding that a further escalation of trade tensions could lead to growth and inflation undershooting projections.

The stronger euro and declining energy prices also reinforce disinflationary pressures, reinforcing expectations that the ECB’s easing cycle may slow. Some economists warn that inflation could drop below the target next year, reviving memories of the pre-pandemic era of persistent undershooting.

Market Reaction and Investor Positioning

Market participants are now pricing in a high likelihood of a rate pause in July. Analysts from Goldman Sachs and Schroders expect limited further cuts, with divergence in views on whether one or two more reductions are feasible this year. The ECB’s cautious stance has been welcomed by bond markets, with traders turning their attention to fiscal developments and geopolitical risks.

Outlook: EUR/USD Neutral with Downside Risk

The euro is edging higher following the ECB cut, with short-term risks tilted to the downside. While support from higher government spending and defense investment may help stabilize growth, mounting global trade uncertainty, especially from the U.S., continues to pressure the euro. With Lagarde reaffirming a data-dependent stance, traders should expect EUR/USD to test lower ranges if July confirms a pause and trade tensions escalate further.

More Information in our Economic Calendar.