ECB July Rate Decision Commentary: Euro Bulls Should Exercise Caution Amid Potential Mid-Term Reversal

TradingKey - On 24 July 2025, the European Central Bank (ECB) released its decision on policy interest rates, maintaining all three key rates as anticipated, with the deposit facility rate steady at 2%. The decision to hold rates steady stems from two main factors. First, regarding inflation: ongoing wage growth persistence raises the risk of renewed inflationary pressures in the Eurozone in the near term, with core CPI still exceeding the ECB’s 2% target. Second, on the growth front: July’s manufacturing and services PMI figures improved compared to previous readings, reflecting a recovery in the Eurozone economy. These conditions suggest the ECB is not yet compelled to pursue rate reductions this month. Moving forward, potential tariffs from a Trump administration could hinder Eurozone economic growth, which may alleviate inflationary pressures. Consequently, the ECB is likely to lean toward a looser monetary policy. In the short term (0-3 months), the global push for de-dollarisation continues to shape forex markets, putting downward pressure on the U.S. dollar index and offering temporary support for the euro. This creates potential gains for euro-dollar bullish trades. However, in the medium term (3-12 months), continued ECB rate cuts could suppress the euro’s value. As the EUR/USD pair is likely to experience an initial uptrend followed by a downturn, euro bulls should remain cautious of a possible mid-term trend reversal.

Source: TradingKey

Main Body

On 24 July 2025, the European Central Bank (ECB) released its policy interest rate decision, aligning with widespread market expectations by maintaining all three key rates unchanged, with the deposit facility rate steady at 2% (Figure 1).

Figure 1: Market Consensus Forecasts vs. Actual Data

Source: Refinitiv, TradingKey

The choice to keep interest rates steady in July was based on two key considerations. First, on the inflation front: while headline CPI inflation fell sharply from 2.5% in January to 2% in June, wage growth continues to remain strong. If this persistent wage pressure continues, the Eurozone may face the risk of renewed inflation in the short term. The ECB closely monitors core CPI, which is currently at 2.3%, above the 2% target set by the ECB (Figure 2). With sustained high wage growth and elevated core inflation levels, the ECB found it difficult to pursue additional rate reductions in July.

The second consideration pertains to economic growth: bolstered by synchronised monetary and fiscal measures, the Eurozone economy has demonstrated significant progress. According to high-frequency data, the preliminary composite Purchasing Managers’ Index (PMI) for July advanced to 51 from 50.6 in June. In detail, the services PMI rose from 50.5 to 51.2, and the manufacturing PMI increased from 49.5 to 49.8, reaching its highest level in 36 months. In light of this economic upturn, the ECB sees no immediate need to implement ongoing rate reductions.

Figure 2: Eurozone CPI (%, y-o-y)

Source: Refinitiv, TradingKey

Following the start of rate reductions in June 2024, the European Central Bank (ECB) has lowered policy rates by a total of 235 basis points (Figure 3). We project that the ECB will resume cutting rates in September, likely leading the Eurozone into a low-rate environment by mid-2026. This expectation is again based on two primary considerations: economic growth and inflation dynamics. From a growth perspective, the Eurozone faces significant risks from U.S. foreign policy, notably Trump’s recent hints at imposing 30% tariffs. If such measures slow Eurozone or global economic growth, the ECB is poised to implement a more dovish monetary policy. On the inflation front, reduced economic growth could dampen demand-side inflationary pressures. According to the ECB’s June forecasts, inflation is expected to stabilise at 2% in 2025 and drop to an average of 1.6% in 2026. With inflation trending lower, the ECB can pursue further rate cuts without heightened concerns about resurgent inflation.

The ongoing global shift toward de-dollarisation will continue to be a pivotal driver of foreign exchange market trends over the short term (0-3 months). This movement is expected to weaken the U.S. dollar index, offering temporary support to the euro’s exchange rate. Consequently, investors with bullish EUR/USD positions may still see profit potential. However, in the medium term (3-12 months), persistent ECB rate cuts are likely to suppress the euro’s value. As the EUR/USD pair is anticipated to rise initially before declining, those trading long on the euro should remain cautious of a potential mid-term trend reversal in their strategies.

Figure 3: ECB Policy Rate (%)

Source: Refinitiv, TradingKey

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