EUR/USD rebounds as ECB holds rates and US inflation cools
- EUR/USD rebounds after the ECB leaves interest rates unchanged, in line with expectations.
- The ECB sticks to a data-dependent approach as updated projections point to inflation returning to target over time.
- Softer US inflation data weighs on the US Dollar, offering support to the Euro.
The Euro (EUR) regains ground against the US Dollar (USD) on Thursday after the European Central Bank (ECB) kept its three key policy rates unchanged. At the time of writing, EUR/USD trades around 1.1756, reversing higher after dipping to an intraday low near 1.1712.
The ECB left borrowing costs unchanged for a fourth consecutive meeting. The interest rates on the Deposit Facility, the Main Refinancing Operations and the Marginal Lending Facility were kept steady at 2.00%, 2.15% and 2.40%, respectively, in line with market expectations.
The Governing Council reiterated its commitment to ensuring that inflation stabilises at its 2% target over the medium term. Policymakers stressed that future decisions will remain data-dependent and taken on a meeting-by-meeting basis, guided by the inflation outlook, incoming economic and financial data, underlying price dynamics and the effectiveness of monetary policy transmission. The ECB also underlined that it is not pre-committing to a specific rate path.
The ECB’s latest staff projections show inflation moving back toward the 2% target over the medium term. Headline inflation is expected to average 2.1% in 2025, ease to 1.9% in 2026 and 1.8% in 2027, before returning to 2.0% in 2028. The ECB noted that the 2026 inflation outlook was revised higher as services inflation is now expected to cool more slowly.
The ECB also upgraded its growth outlook compared with the September forecasts. The Eurozone economy is now expected to grow 1.4% in 2025, 1.2% in 2026 and 1.4% in 2027, with growth seen holding at 1.4% in 2028, supported mainly by domestic demand.
Further supporting the Euro, the US Dollar came under pressure after the latest US inflation report surprised to the downside, reinforcing expectations that the Federal Reserve (Fed) could deliver further monetary policy easing into 2026.
The Consumer Price Index (CPI) rose 2.7% YoY in November, missing market expectations of 3.1% and easing from 3.0% in September. Core CPI, which excludes food and energy, also slowed to 2.6% YoY from 3.0%, below forecasts of 3.0%.
However, firmer-than-expected US labour market data offered some support to the US Dollar. Initial Jobless Claims fell to 224K, slightly below expectations of 225K and down from the previous 237K.
Attention now turns to ECB President Christine Lagarde’s press conference, which could shape near-term expectations for the Euro.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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