Key points:

  • The main reason for lowering rates is the slowing economic growth in the eurozone.
  • Markets are already pricing in further rate cuts, putting pressure on the ECB.
  • Political developments in the U.S., especially the upcoming elections and potential trade wars, create uncertainty and could negatively affect the euro.

Traders have increased the likelihood that the European Central Bank (ECB) will lower interest rates more aggressively. This conclusion was drawn after the bank made two consecutive rate cuts for the first time in 13 years, which was perceived as a signal that a more active phase of monetary policy easing has begun.

Why is the ECB lowering rates?

Weaker economic forecasts combined with signs of stabilizing inflation have pushed the ECB to another key rate cut. The decision to reduce the deposit rate by 25 basis points to 3.25% followed the September move and marked the start of the first rate-cutting cycle in a long time. ECB board members emphasized that they aren’t bound by a strict rate-change schedule and will continue to implement cautious monetary policy until they are confident that inflation is fully under control. However, the lack of strong opposition from ECB President Christine Lagarde to market expectations has led to increased bets on further rate cuts and additional weakening of the euro.

Christine Lagarde’s key message is that the ECB’s decisions will be data-driven. Given the observed weakness in the eurozone economy, the ECB is expected to move more swiftly towards a series of rate reductions. Indeed, according to Reuters sources, ECB board members expect rate cuts as early as December unless there is a significant improvement in the economic situation. Markets, in turn, are actively pricing in the likelihood of a 29 basis point cut at the December meeting, reflecting strong expectations for monetary easing.

Germany’s rate-sensitive two-year bond yields have reached their lowest level since October 4, and eurozone stocks have maintained their growth. However, the euro has fallen to $1.0811—the lowest level since early August.

Risks for the euro

By deciding to lower its key interest rate, the ECB has shaped investor expectations for a more accommodative monetary policy. Markets predict that by the end of 2025, the ECB will cut rates more significantly than the U.S. Federal Reserve or the Bank of England.

However, despite the favorable outlook for the eurozone linked to monetary easing, the euro remains weak. One reason for this is the uncertainty surrounding the upcoming U.S. presidential elections and the potential imposition of high import tariffs, which could negatively impact the eurozone economy.

Additionally, stronger-than-expected macroeconomic data from the U.S. is also putting pressure on the euro by reducing the likelihood of significant rate cuts by the Federal Reserve.