Euro retraces after htting five-month high against dollar

The euro fell below $1.085, retreating from a near five-month high of $1.09547 touched on March 18th, after ECB President Christine Lagarde warned of weaker growth prospects but downplayed inflation risks if the European Union retaliated against US tariffs.

Euro retraces after htting five-month high against dollar

Speaking to European lawmakers on Thursday, Lagarde cautioned that a 25% US tariff on European imports could reduce euro area growth by 0.3 percentage points in the first year, with a counter-tariff from the EU potentially deepening the hit to 0.5 percentage points. She noted that the sharpest impact would occur in the initial year, but the effects could linger longer, affecting output across the region. Despite these challenges, Lagarde downplayed the risk of inflationary pressures spiking as a result of the tariffs, signaling that the European Central Bank (ECB) would likely not respond by raising rates.

ECB warns on inflation and growth

Lagarde's comments on inflation and growth were echoed by ECB Governing Council member François Villeroy de Galhau, who emphasized that the ECB still had room to further lower borrowing costs if necessary. He noted that inflation remained less of a concern in the eurozone compared to the US, where inflationary pressures have been more pronounced. In light of this, traders have scaled back their expectations for ECB rate cuts, now pricing in only two reductions this year, down from earlier forecasts of more aggressive rate cuts. The shift in market expectations reflects growing confidence that the ECB may hold off on more drastic monetary easing, as inflation risks in the eurozone remain relatively subdued compared to the US.

Expectations on Fed moves

Meanwhile, the US Federal Reserve held rates steady in its latest policy meeting but reaffirmed plans to implement two rate cuts later this year, reinforcing a divergence in monetary policy expectations between the two regions. This contrast in outlooks for US and EU interest rates, along with the concerns over the potential economic impact of trade tensions, led to the euro's decline against the dollar. The ongoing uncertainty around the US tariffs, the EU's response, and their broader impact on global trade and inflation expectations continues to weigh on the euro, as traders remain cautious about the potential economic fallout from these developments.