EUR surges, ECB 'all but certain' to deliver 25bp cut on Thursday

The euro has surged north of the 1.07 level this morning, riding the wave of the broad weakness that we’re seeing in the US dollar. News that Germany’s Chancellor-to-be Friedrich Merz had agreed a deal with his likely coalition partners to unlock an additional fiscal injection has provided additional support for the common currency.

The soon to be coalition of the CDU and SPD will present a bill in parliament next week designed to soften Germany’s existing borrowing rules, namely the country’s ‘debt brake’, which would allow for greater spending on defence and around €500 billion on infrastructure over the next decade.

Markets have reacted to the news in a positive fashion, sending the euro higher, while German bund yields have jumped almost 20bps this morning.

The big question now is whether or not the move upwards in the euro can be sustained.

With Trump’s early-April deadline for tariffs looming large, and the European Central Bank showing no signs yet of letting up on its easing cycle, we think that a correction is in the offing.

Another 25bp cut from the ECB is all but a certainty on Thursday but, as we’ve outlined in our March meeting preview report, the path beyond then is not necessarily clear cut.