Published by Global Banking & Finance Review®
Posted on June 5, 2025
4 min readLast updated: January 23, 2026
Add as preferred source on GoogleThe ECB is nearing the end of its rate cut cycle, boosting the euro and bond yields, with markets anticipating one more cut amid U.S. tariff uncertainties.
By Dhara Ranasinghe and Naomi Rovnick
LONDON (Reuters) -Traders are increasingly confident the European Central Bank will pause its run of interest rate cuts now that the central bank sees itself as well-positioned to deal with global economic uncertainty fuelled by U.S. tariff policy.
Following Thursday's quarter-point cut in rates to 2%, ECB chief Christine Lagarde said the central bank was in a "good place" and was getting to the end of the monetary policy cycle.
That lit a fuse under markets: The euro rose to six-week highs against the dollar and rate-sensitive short-dated euro zone government bond yields jumped as investors trimmed their rate cut bets.
Money markets now price in a roughly 20% chance of a July cut compared with almost 30% just before Lagarde started speaking, with market attention initially falling on downward revisions to the ECB's latest inflation forecasts.
While traders still anticipate one more cut this year given U.S. tariff uncertainty, the bigger picture is that the ECB's most aggressive easing cycle since the 2008/2009 global financial crisis was nearing an end, analysts said.
"The phrase that turned markets was that the ECB is in a good place to navigate the uncertainties," said Aviva Investors senior economist Vasileios Gkionakis.
"Absent a major shock on tariffs or an external shock, the most likely outcome is that the ECB is done."
The euro rose more than 0.5% to $1.1481, while two-year German government bond yields rose 8 basis points to around 1.88% in their biggest one-day jump in more than three weeks.
"The strength of the euro is coming from the ECB's surprisingly hawkish message that they are approaching the end of the cutting cycle with today's rate cut," said Commerzbank currency strategist Michael Pfister.
Becky Qin, multi-asset portfolio manager at Fidelity International, said she took a positive view on the euro given expectations for European investors to bring money back home from the United States.
The euro's trade-weighted exchange rate is up almost 4% so far this year while oil prices are down 13%, putting downward pressure on inflation.
Data on Tuesday showed inflation slowed to 1.9% in May from 2.2% a month earlier.
TURNAROUND
A cut in the ECB's inflation projections initially caught market attention, but that was quickly overshadowed by Lagarde's comments.
"The language was tilted to a pause being the base case," said Gareth Hill, portfolio manager at Royal London Asset Management.
"The objective for this meeting was to get the market prepared for rates staying near where they are right now in case something left-field comes."
Inflation could dip in the short term - possibly even below the ECB's target - but increased government spending, including German fiscal stimulus and higher trade barriers, may add to price pressures later.
Lagarde said policymakers were "virtually unanimous" on the rate cut.
"Despite the downward revision on growth and inflation since the last forecast, given the uncertainty about trade negotiations for the ECB to be data-dependent is the right assessment," Fidelity's Qin said.
"'Wait-and-see or pause' is probably the fair assessment for the next meeting."
Europe's broad stock index trimmed its falls following the ECB decision. Banking stocks rallied and their outperformance was another sign that investors were sensing an end to further rate reductions.
ELEPHANT, ROOM
Analysts said that U.S. tariff policy remained the biggest challenge to the ECB outlook.
U.S. President Donald Trump last month backed away from his threat to impose 50% tariffs on imports from the European Union, restoring a July 9 deadline to allow for talks between Washington and the 27-nation bloc to produce a deal.
"It's 3-4 months since Trump's inauguration and the world has changed and turned upside down, so forecasting with certainty what will happen in the next few months would be challenging," said RLAM's Hill.
The ECB expects the economy to grow 0.9% this year and trimmed 2026 forecasts to 1.1%.
Aviva's Gkionakis noted the euro zone economy was holding up better than anticipated at the start of the year, with the composite PMI -- a closely watched gauge of business activity -- holding around the 50 mark that divides contraction from expansion.
"My view is that the ECB should stay at 2%," he added.
(Reporting by Dhara Ranasinghe and Naomi Rovnick; additional reporting by Lucy Raitano; Editing by Hugh Lawson)
Lagarde stated that the ECB is in a 'good place' and is nearing the end of the monetary policy cycle.
The euro rose to six-week highs against the dollar, and short-dated euro zone government bond yields jumped as investors adjusted their rate cut expectations.
Money markets now price in a roughly 20% chance of a July cut, down from almost 30% before Lagarde's comments, indicating that traders anticipate one more cut this year.
Analysts noted that U.S. tariff policy remains the biggest challenge to the ECB's outlook, particularly with ongoing trade negotiations.
The ECB expects the economy to grow by 0.9% this year, having revised its forecasts downwards due to economic uncertainties.
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