ECB Rate Cuts Loom as Euro Surges; Trade Risks Add Uncertainty

The European Central Bank (ECB) is expected to reduce its deposit rate to 2.50%, as surveyed by Reuters. Further cuts are anticipated by mid-year, but the outlook beyond June remains unclear, as inflation is projected to stay near the ECB’s 2% target, reducing the need for aggressive rate cuts. However, economic stagnation and external risks, particularly trade tensions, complicate decision-making. The market has priced in a rate of 2.00% by the end of the year, though some economists believe it could fall further.

U.S. President Donald Trump's proposed 25% “reciprocal” tariff on European cars and goods adds complexity to the ECB’s policy choices. Nearly all respondents in the Reuters poll flagged the potential damage to eurozone growth, as uncertainty over trade conflicts reduces investment. The ECB faces a dilemma: balancing the need to support growth with maintaining price stability. Following the expected rate reduction on March 6, the ECB is likely to implement another 50 basis-point cut next quarter before holding rates steady through at least 2026.

The euro has surged, reaching a four-month high against the U.S. dollar, boosted by rising European bond yields. Germany’s proposed 500 billion-euro infrastructure fund and changes to borrowing rules have bolstered investor confidence, with 30-year bond yields rising by up to 25 basis points at one point. The shift in Germany’s fiscal policy, which leverages its strong balance sheet for infrastructure and defense spending, has caught markets by surprise and contributed to the euro's strength. Analysts now predict the euro may continue to gain, with Deutsche Bank, Rabobank, and MUFG reversing their previous bearish outlooks. A key catalyst for this shift is the German government’s agreement with political parties to relax long-standing debt limits, enabling increased spending, particularly in infrastructure and defense. This is expected to counterbalance potential trade-related economic shocks.

Despite these positive developments, eurozone economic growth remains sluggish, with services expansion barely offsetting prolonged manufacturing downturns. Latest purchasing managers' index (PMI) data suggests stagnation, with overall demand continuing to weaken. Inflation remains a concern, especially in the services sector, where price pressures persist despite a broader slowdown in wage growth. This divergence in economic indicators has led to internal divisions within the ECB’s Governing Council over the pace of future rate cuts.

Consumer sentiment remains subdued, with households expecting stagnant or declining real incomes, reinforcing the case for further stimulus. In Germany, economic contraction in Q4 2024, with a 0.2% decline in GDP, reflects weaker exports and rising energy costs. Despite a slight GDP increase in Q3, Germany continues to face challenges, including competition from abroad, high energy prices, and uncertain economic prospects.

Germany’s fiscal challenges have been compounded by rising borrowing costs, due to an agreement to create a 500 billion-euro infrastructure fund and relax borrowing rules. This deal could raise Germany’s debt to 3.6 trillion euros by 2029, raising concerns about fiscal stability, although Germany is expected to maintain its top credit rating. Business activity in the services sector has slowed, with weak demand and declining new orders. Employment growth has also slowed, and business morale remains low, reflecting limited optimism for recovery.

In France, inflation fell below 1% in February, driven by a sharp decline in energy prices. However, the French services sector faced its steepest contraction since October 2023, with business activity dropping and input costs rising. The manufacturing sector also showed signs of easing contraction, though challenges persist. France is grappling with budget constraints while seeking to increase defense spending, putting pressure on President Macron’s government to balance a growing deficit with the need for higher security spending. This situation mirrors that of Germany, which is under pressure to reform its economic policies.

In the U.S., the dollar is expected to maintain its strength despite recent trade policy uncertainty. Trump's tariff policies have weighed on the dollar, leading to a nearly 2.5% drop against other major currencies. A Reuters survey found that most currency strategists expect net-long dollar positions to decline, while a few predict further increases.

The dollar’s weakness is compounded by slow U.S. economic growth, with concerns over inflation and the impact of tariffs. Recent U.S. economic reports, including the Federal Reserve’s Beige Book, highlight modest growth but increasing concerns about Trump's policies. Despite slight growth in some sectors, many businesses are wary of tariffs' impact on their operations, and the Federal Reserve’s outlook is uncertain.

Private payroll growth in the U.S. slowed significantly in February, indicating a broader economic slowdown. Consumer sentiment has also declined, particularly among liberals, reflecting growing concerns about tariffs and political uncertainty.

As a result, the EUR/USD is expected to remain volatile in the coming months as shifting ECB and Federal Reserve policies drive sentiment. The euro's recent strength, fueled by rising German bond yields and expanded fiscal spending, could persist in the short term, potentially pushing EUR/USD toward the 1.12–1.15 range. However, medium-term risks remain, as the ECB is set to cut rates further while the Federal Reserve's stance on monetary easing remains uncertain. Given these dynamics, the euro’s bullish momentum may extend in the near term, but a return to 1.08–1.10 levels remains possible if economic conditions deteriorate or if the Federal Reserve signals a slower pace of rate cuts.

Data for Technical Analysis (1H) CFD EUR/USD

Resistance : 1.0817, 1.0824, 1.0836

Support : 1.0793, 1.0786, 1.0774

1H Outlook   

Source: TradingView 

Buy/Long 1 If the support at the price range 1.0778 - 1.0793 is touched, but the support at 1.0793 cannot be broken, the TP may be set around 1.0818 and the SL around 1.0771, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0817 - 1.0832, TP may be set around 1.0849 and SL around 1.0786, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0817 - 1.0832 is touched, but the resistance at 1.0817 cannot be broken, the TP may be set around 1.0787 and the SL around 1.0839, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0778 - 1.0793, TP may be set around 1.0756 and SL around 1.0824, or up to the risk appetite.       

Pivot Points Mar 6, 2025 08:27AM GMT