ECB next policy move more likely to be a rate cut than a hike

Thursday’s ECB announcement came and went without creating any real alarm. President Lagarde reiterated that monetary policy is in a “good place” and that risks to the inflation and the growth outlook remain “broadly balanced.

We were focusing on her comments on the recent euro appreciation, but while she said that a stronger currency clearly warrants close monitoring, she also noted that alarm bells are not ringing at the ECB just yet - it's worth noting that the trade weighted euro index has actually traded essentially flat in the past six months or so, despite the recent EUR/USD rally.

Lagarde's reaffirmation that the ECB does not target a specific exchange rate comes as no surprise. However, her observation that further euro appreciation could push inflation below current expectations justifies market expectations that the next policy move is more likely to be a rate cut than a hike.

That said, we continue to expect ECB policy rates to remain unchanged throughout 2026, which should, we think, help foster further gradual gains in the common currency this year.