The euro extended its decline to $1.45 as traders weighed the implications of increased defense spending on inflation, fiscal policy, and interest rates in the Eurozone.
Euro keeps on falling against US dollar
The currency faced additional pressure as uncertainty loomed over how European governments would manage the financial burden of supporting Ukraine amid shifting geopolitical dynamics.
With the U.S. signaling plans to scale back its financial and military assistance to Ukraine while pursuing negotiations with Russia to end the war, European leaders scrambled to reassess their strategy. A high-level meeting in Paris brought together key EU policymakers to explore alternative ways to sustain Ukraine’s defense and economic stability. However, the informal gathering ended without concrete measures, fueling concerns about Europe’s ability to maintain unified support in the absence of U.S. leadership.
Eyes on Ukraine war
Strengthening defense capabilities and providing continued aid to Ukraine is expected to impose a significant financial strain on Europe’s largest economies, with estimates suggesting the costs could reach $3.1 trillion over the next decade. This raises concerns about higher fiscal deficits, potential tax hikes, and inflationary pressures that could complicate the European Central Bank’s monetary policy path.
On the monetary policy front, the ECB is widely expected to begin easing rates in the coming months to counter slowing economic growth and tame persistently low inflation. Markets are pricing in a 25-basis-point cut at each of the next three meetings, bringing the deposit rate down from its current level of 2.75%. If economic conditions warrant further easing, forecasts suggest rates could fall below 2% by 2026.
Uncertainty remains over the ECB pace of rate cuts
Still, uncertainty remains over the ECB’s pace of rate cuts, especially as inflation dynamics evolve. While price pressures have moderated, rising defense expenditures and fiscal stimulus measures could stoke inflation, potentially delaying aggressive rate reductions. Additionally, the euro’s recent depreciation could contribute to imported inflation, making the ECB’s policy decisions even more delicate.
Looking ahead, investors will closely monitor upcoming ECB speeches, inflation data, and geopolitical developments for further clues on the euro’s trajectory and the central bank’s policy response. The balance between economic growth, inflation control, and geopolitical risks will play a crucial role in shaping the euro’s performance in the coming months.
