The euro is trading at nearly 1.20 against the US dollar—a level not seen since June 2021. According to Jörg Held, Head of Portfolio Management at ETHENEA Independent Investors S.A., this presents the European Central Bank (ECB) with a mixed picture: while a strong currency dampens inflation, it also weighs on exporters and could slow the economic recovery. Nevertheless, Held expects the deposit rate to remain unchanged at 2.0 percent at the meeting on February 5—for the fifth time in a row. He argues:
“The current data justify a pause in interest rates. On the one hand, inflation fell to 1.9 percent in December, putting it back below the ECB’s two-percent target for the first time in months. On the other hand, economic growth in the fourth quarter surprised slightly on the upside at 0.3 percent. However, uncertainty has increased, as the euro has appreciated by around three percent since December, generating additional deflationary pressure. Added to this are tariff threats from the United States and falling import prices from China due to overcapacity. Both could push inflation even lower. Which will prevail: recession risks or inflationary pressures in the services sector?”
At the same time, inflation risks persist. Services inflation remains at 3.4 percent, and wage growth exceeded expectations in the third quarter, reaching 4.0 percent year-on-year. Against this backdrop, the ECB Governing Council is divided: while some members warn of recession risks and see scope for further easing, others emphasize the persistent price pressures in the services sector.
As a result, the exchange rate has come into focus. Austria’s central bank governor, Martin Kocher, has already warned that further euro appreciation could necessitate monetary policy responses. Markets have reacted accordingly: the probability of an interest rate cut in the summer has risen from 15 to 25 percent.
The ECB is keeping all options open and continues to make decisions on a meeting-by-meeting, data-dependent basis. At the upcoming interest rate decision, ECB President Christine Lagarde is expected to reaffirm that monetary policy is in a good starting position, but not set in stone. Until uncertainty—whether related to trade or the exchange rate—eases, the deposit rate is likely to remain at 2.0 percent.
