The euro extended its gains above $1.08, reaching a fresh four-month high, after the European Central Bank (ECB) delivered a widely expected 25bps rate cut and signaled a shift toward a less restrictive monetary policy, suggesting a potential pause in further rate cuts.
Euro extends gains after ECB
Policymakers adjusted their language, dropping previous references to a "restrictive policy" and emphasizing that future decisions would remain data-dependent rather than following a pre-set course. This shift reinforced expectations that the ECB may take a more cautious approach in the coming months. Traders are currently pricing in one or two additional 25bps rate reductions this year, but the timing remains uncertain, particularly as inflation and economic growth data continue to shape the ECB’s next moves.
Prospects of increased spending and borrowing support euro
Meanwhile, prospects of increased spending and borrowing in Europe have provided additional support to the euro. The expectation of greater fiscal stimulus, particularly in defense and infrastructure, has driven optimism about economic activity in the region. EU leaders are convening today for an extraordinary meeting on defense, as geopolitical tensions and security concerns push military spending higher on the agenda. European Commission President Ursula von der Leyen has already proposed an ambitious €800 billion plan aimed at enabling EU member states to significantly increase their defense budgets despite ongoing fiscal constraints. The proposal includes granting countries more fiscal flexibility to invest in defense, as well as providing €150 billion in loans to help finance these efforts.
Focus on ReArm plan
The plan comes amid growing pressure for Europe to reduce its reliance on external military support and take greater responsibility for its own security. While some EU member states have welcomed the initiative, others remain cautious, particularly given existing budgetary challenges and the potential impact on national debt levels. The discussion around defense spending is expected to remain a key theme in European policymaking, with potential implications for the broader economic outlook, government bond markets, and currency movements.
As markets digest the ECB’s rate decision and fiscal developments, the euro’s strength is also being supported by a weaker US dollar, which has been under pressure due to shifting expectations regarding Federal Reserve policy. Investors are closely watching upcoming economic data from both regions to assess whether the euro can sustain its upward momentum or if profit-taking may lead to a temporary pullback.
