The EURUSD keeps falling to lows not seen since early 2025. That’s when US President Donald Trump announced a series of measures that weakened the dollar, particularly compared to the euro. The world’s most traded currency pair shot up 17% at the start of last year. But the recent downtrend has traders wondering if it will continue to erase those gains.
This week could be pivotal for the euro. A busy slate of ECB members will speak at various events ahead of this month’s monetary policy meeting. Until recently, markets viewed the shared central bank as one of the most hawkish. Two more rate hikes looked possible this year. But doubts about that trajectory have risen. This has left the euro weaker, particularly after ECB President Christine Lagarde’s comments last week.
Why the Large Shift in Outlook
Last week, Lagarde spoke before the European Parliament committee on finance. She noted that rising bond yields were doing “some” of the central bank’s work. Global yields have risen as investors track higher interest rates from central banks. Growing nervousness about stretched budgets, large deficits and looming debt piles has also pushed yields higher. The objective of raising central bank rates is to raise borrowing costs. If the market is already doing that, the central bank faces less pressure to hike.
Secondly, Lagarde downplayed the “second round” impact of higher energy prices. This was perhaps a larger contributor to the market move. Through the summer, several ECB officials, including Lagarde herself, had expressed concern that higher crude prices would lead to rising consumer costs across the economy. If that happened, then the central bank would have to raise rates. But energy prices might not cause prices in the rest of the economy to rise significantly. In that case, the ECB would be more likely to hold.
The ECB Is Turning Dovish
This week could be pivotal for the euro. The market could conclude that the ECB is not as hawkish as it originally thought. Just two weeks ago, the market saw an 80% chance of two rate hikes for the rest of the year. Now the odds of just one hike have dropped to 60%.
Depending on what ECB members say this week, the market could price out a rate hike. The EURUSD could then fall substantially. On the other hand, ECB speakers could continue to stress their concerns about inflation. The market might then recover confidence in a December hike and shore up the euro.
Looking for a Consensus in the ECB
A total of eight ECB members are scheduled to speak this week. They include Chief Economist Philip Lane and Vice President Boris Vujcic. Lagarde will also make another appearance, this time at the Ecofin meeting. Lane’s comments, in particular, will likely face close scrutiny. Markets viewed him as one of the more hawkish members. During the summer, he repeatedly warned that the ECB would need to tighten further. On Monday, he signalled that a more sluggish economy would limit the need for further hikes.
To regain confidence in further rate hikes, markets will look to ECB members to affirm their summer inflation concerns. The general tone might instead suggest a slower economy and that recent rate hikes are bringing inflation into line. In that case, the euro could become even weaker.
