The euro edged slightly lower to just under $1.049, retreating from a one-month high of $1.0528 reached on February 24th, as concerns emerged over the outlook for European defense spending and broader economic uncertainty.
Euro slightly down in absence of macro drivers
Germany’s incoming chancellor, Friedrich Merz, ruled out a swift reform of the country’s borrowing limits and stated that it was too early to determine whether the outgoing parliament could approve a major military spending increase. This signaled potential delays in Germany’s defense funding plans, which have been a key focus following increased geopolitical tensions in Europe.
Meanwhile, economic data painted a mixed picture for the Eurozone. German consumer sentiment unexpectedly weakened heading into March, reflecting persistent concerns over inflation and economic growth. On the other hand, French consumer morale improved to a four-month high in February, driven by declining inflation expectations and a slightly more optimistic labor market outlook. However, economic uncertainty remains high across the bloc, as businesses and consumers navigate shifting monetary policy conditions and external risks.
Focus on next week ECB meeting
Investors also remained cautious ahead of next week’s European Central Bank (ECB) policy meeting, where the bank is widely expected to cut interest rates for a fifth consecutive time. ECB policymaker Joachim Nagel recently suggested that further rate cuts remain an option if inflation continues to ease toward the central bank’s 2% target. However, his colleague Isabel Schnabel cautioned that the ECB may be approaching a point where it needs to pause or halt reductions, highlighting the ongoing debate among policymakers over the pace and extent of monetary easing.
Eyes on guidance
Looking ahead, market participants will closely watch the ECB’s guidance on future policy moves, as well as upcoming inflation and economic activity data, which could provide further clues on the central bank’s next steps. The euro’s performance in the near term is likely to be influenced by shifts in interest rate expectations, economic sentiment, and geopolitical developments across the region.
