The ECB's interest rate cut in June is confirmed. How long can the euro maintain its strength?

June will soon witness a major meeting of the European Central Bank. According to market consensus, the ECB is expected to announce a 25 basis point cut in the deposit rate to 2% in this decision. From a broader macro perspective, this will be the seventh rate cut by the bank in the past 12 months, reflecting the pressures faced by the Eurozone economy.

Inflation Data Supports Rate Cuts, But Not the Last

The latest economic data provide a foundation for the rate cut. The harmonized CPI YoY preliminary figure for the Eurozone in May was 1.9%, the first time in nearly eight months that it has fallen below the ECB’s 2% target. As inflation pressures ease, the ECB, in its latest quarterly forecast, is expected to revise down its outlook for economic growth accordingly.

However, a single rate cut is not the end of the story. Most market analysts believe that the ECB will make another move in the second half of this year, with the deposit rate further lowered to around 1.75%. Currently, LSEG data shows that the market has fully priced in the 25 basis point rate cut in June and has some expectations of further cuts before the end of the year.

Rate Cuts ≠ Euro Depreciation, Here’s a Key Variable

According to conventional logic, a central bank rate cut usually weakens the domestic currency. But the euro’s performance might defy this expectation. Analysis from Uxin Bank points out that, considering the overall weakness of the US dollar, the ECB’s rate cut measures may not significantly drag down the euro. In other words, it’s the weakness of the dollar rather than strength of the euro.

From a technical perspective, EUR/USD is expected to stay within the 1.10-1.15 range. Several strategic research departments note that the market has already priced in expectations of further rate cuts, and investors tend to buy on dips, a spontaneous defensive behavior that effectively limits the euro’s decline.

Breakthrough Point Lies in the US Dollar Fundamentals

Danske Bank’s view is more direct: the dollar needs a clear improvement in economic data to reverse its downward trend. Before stronger employment, growth, or inflation data emerge, EUR/USD is expected to continue rising. This means that while the ECB’s rate cut pace will continue, it is unlikely to reverse the overall trend in the forex market.

From a broader perspective, EUR/CNY forecasts also need to pay attention to the US dollar’s movements—during a weak dollar cycle, non-US currencies generally benefit. Investors are waiting for a turning point in US economic data, but until then, the actual impact of ECB rate cuts on the euro exchange rate may be less than expected.