Is there still room for the euro to rise? Unexpected opportunities amid central bank rate cuts

The European Central Bank is set to announce its interest rate decision on June 5th, with widespread market expectations that the deposit rate will be cut by 25 basis points to 2%. This will be the eighth rate cut by the bank in the past year. Many people instinctively think that a rate cut means a weaker euro, but the reality may be more complex.

Inflation Data Paves the Way for Rate Cuts

According to the latest statistics, the eurozone’s May harmonized CPI preliminary year-on-year figure fell to 1.9%, hitting an eight-month low and first dropping below the ECB’s 2% target. This shift provides ample justification for the central bank to cut rates. In the upcoming quarterly forecast, analysts expect the ECB to simultaneously revise down its projections for inflation and economic growth for the year.

Market consensus suggests another rate cut before the end of the year, with deposit rates stabilizing around 1.75%. According to LSEG data tracking, investors have fully priced in the 25 basis point cut in June and are even pricing in the possibility of the last rate cut of the year.

Why Rate Cuts May Not Necessarily Weaken the Euro?

The key lies in the predicament faced by the US dollar. U.S. bank U.S. Trust’s perspective is worth noting — even if the ECB continues its easing stance, the overall weakness of the dollar environment can actually support the euro to remain strong. This means the euro’s performance depends not only on its own policy but also on whether the dollar has enough economic data to rebound.

Danske Bank analysts further pointed out that for the dollar to regain support, there must be clear signs of economic data improvement. Until then, the upward trend of EUR/USD still has room to continue.

Exchange Rate Range and Market Sentiment

Strategists generally believe that EUR/USD will oscillate within the 1.10-1.15 dollar range. This range formation is not accidental — when the exchange rate falls, investor buying behavior creates natural support, effectively limiting the euro’s decline. The market has already priced in further rate cut risks, and active participation by bulls at the bottom area indicates optimism about the euro’s future prospects.

Overall, the complexity of the macro environment suggests that a simple rate cut policy alone is unlikely to change the euro’s upward trajectory. In the absence of strong economic fundamentals supporting the dollar, the euro still has conditions to continue its upward exploration.