The euro's trend is about to reach a critical moment. Can the rate cut decision reverse the upward trend?

June 5th is an important milestone in the European financial markets. On this day, the European Central Bank will announce its latest interest rate decision. The market widely expects the bank to implement an eighth rate cut, lowering the deposit rate by 25 basis points to a new level of 2%.

Inflation Data Paves the Way for Rate Cuts

The latest released data lays the foundation for the rate cut operation. The harmonized CPI YoY preliminary figure for May in the Eurozone was 1.9%, the first time in eight months that it has fallen below the ECB’s 2% target. Driven by declining inflation and uncertainties surrounding Trump’s trade policies, the economic outlook faces pressure. Industry insiders expect that when the ECB releases its quarterly forecasts, it will also revise down its estimates for inflation and growth.

Limited but Certain Room for Further Rate Cuts

After this round of rate cuts, the ECB’s policy adjustment pace will gradually slow down. Most analysts believe that the bank will implement one more rate cut in the second half of this year, after which the deposit rate will stabilize around 1.75%. Market data from the exchange’s electronic communication group (LSEG) fully reflects this expectation, confirming that a 25 basis point rate cut in June is almost certain, with the possibility of another cut within the year.

Can Rate Cuts Lower the Euro Exchange Rate? The Answer Might Surprise You

Although rate cuts usually weaken a country’s currency, the euro’s performance might break this pattern. Analysis from UBS indicates that, due to the overall weakness of the US dollar, the euro has the fundamental conditions to remain strong. Even if the ECB cuts rates as scheduled, the euro is unlikely to experience significant depreciation.

The strategic analysis team further points out that the market has already priced in the rate cut expectations. The EUR/USD trading channel is expected to fluctuate within the range of 1.10 to 1.15 dollars. When the exchange rate falls back, buyer interventions will form support, effectively limiting the euro’s downside.

The US Dollar’s Recovery Requires Hard Data Support

Analysts at Danske Bank believe that for the dollar to regain investor favor, there must be a clear improvement in economic data. Until then, the upward trend of EUR/USD is expected to continue, and the dollar’s pressure is unlikely to change in the short term.

From a macro perspective, although rate cuts are widely used as a policy tool, their influence on the euro’s trend in the current complex forex market is limited. What truly determines the future direction of the euro is the fundamental support capacity of the US dollar itself.