The European Central Bank is "standing still", so why is the market panicking?
2025-09-11 20:38:06
On Thursday (September 11th) at 8:15 PM Beijing Time, the European Central Bank (ECB) announced that it would maintain its three key interest rates unchanged: the deposit facility rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending rate at 2.40%, fully in line with market expectations. Following the announcement, the ECB raised its economic growth forecast for 2025 to 1.2% (from 0.9%), but lowered its growth forecast for 2026 to 1.0%. Its inflation forecasts are projected to be 2.1% in 2025, falling to 1.7% in 2026, and rebounding to 1.9% in 2027. Core inflation is projected to be 1.8% in 2027, both slightly below the medium-term target of 2%.
Following the announcement, the euro/dollar pair plummeted from 1.1684 to 1.1664, a drop of approximately 0.25%. German 10-year government bond yields remained stable at 2.66%. The market reaction was mild but bearish, reflecting investors' mixed feelings regarding the ECB's cautious stance. This article will analyze the shift in market sentiment following the decision, focusing on immediate market reactions, institutional and retail investor interpretations, and expectations of a Fed rate cut, and provide an outlook for the euro's future trajectory.
Following the announcement of the resolution, the euro quickly retreated against the dollar, falling from 1.1684 to 1.1664, a short-term fluctuation of approximately 20 pips. This suggests a bearish market reaction to the ECB's decision to maintain interest rates. Despite an upward revision to 1.2% in economic growth forecasts, the downward revision in inflation expectations and Lagarde's statement at the press conference that the economy is "data-dependent and does not pre-determine its path" failed to instill confidence in the market. Germany's 10-year government bond yield remained at 2.66%, indicating a relatively muted bond market reaction to the resolution, with investors focusing more on the balance between the Eurozone's economic resilience and external risks.
Real-time feedback indicated that prior to the decision, the market generally expected the ECB to maintain interest rates, but some traders were betting that Lagarde might send a clearer signal of easing. One institution stated before the decision, "We don't expect any surprises today. The focus will be on the updated economic forecasts, but we expect minimal changes." This view reflected the market's low expectations for the decision. However, following the announcement, the euro's short-term decline indicated a rapid exit from some long positions, shifting market sentiment from cautious optimism to a wait-and-see approach. In contrast, historical data shows that after the 25 basis point rate cut on April 17, 2025, the euro rose against the US dollar, reaching a high of 1.1478. This suggests that the weakening of the US dollar's creditworthiness and expectations of European fiscal stimulus supported the euro at the time. The euro's current rapid decline may reflect market disappointment with the ECB's "hold-on" stance and concerns about future below-target inflation.
Interpretation: Institutional analysis generally focused on the ECB's data-dependent strategy and the uncertainty surrounding external risks. Leading institutions noted that the ECB's decision to maintain interest rates reflects its confidence in the resilience of the Eurozone economy. In particular, the upward revision of its 2025 economic growth forecast to 1.2% reflects optimism about private consumption and German fiscal spending. However, inflation forecasts were lowered to 1.7% in 2026 and 1.9% in 2027, with core inflation at just 1.8% in 2027, suggesting a weakening of inflationary stickiness and increasing the likelihood of future "insurance rate cuts." Institutions estimate that the market's probability of a rate cut before next spring is 50-60%, aligning with expectations of easing by the Federal Reserve. The ECB reiterated, "We are keeping our key interest rates unchanged as inflation is expected to stabilize around our 2% target." This statement was interpreted by institutions as the ECB's intention to extend its wait-and-see approach and avoid prematurely committing to easing.
Retail investor interpretation: Investor sentiment was more divided. Some expressed disappointment with the euro's short-term decline, believing that Lagarde's failure to provide a clearer signal of easing at her press conference had left the market without direction. One trader predicted before the decision, "The prevailing market view is that the ECB will wait and see, awaiting the Federal Reserve's September meeting before making a decision." This prediction was consistent with the decision, but retail investors reacted more emotionally to the euro's decline, with some attributing it to "the market's premature reaction to expectations of a Fed rate cut." Others pointed out that political instability in France and risk aversion fueled by Trump's tariff rhetoric may have exacerbated the euro's selling pressure. In contrast, after the July 24, 2025, EUR/USD exchange rate saw a brief rally to 1.1756, indicating a higher market acceptance of stable interest rates. Currently, retail investor sentiment favors short-term risk aversion, believing the euro could face further pressure.
The impact of the Federal Reserve's monetary policy outlook on the euro's performance cannot be ignored. Market consensus suggests the Fed will cut interest rates by 25 basis points at its September 17-18 meeting, with CME data indicating an 84% probability of a rate cut. Goldman Sachs and other institutions predict the Fed will cut rates three to four times in 2025, potentially lowering the terminal rate to 3%-3.75%. This expectation should theoretically weaken the dollar and boost the euro, but the euro's decline following the decision suggests the market is more focused on internal risks within Europe. Political unrest in France has pushed up French bond yields, and this, coupled with risk aversion fueled by Trump's tariff rhetoric, may offset the potential positive impact of the Fed's rate cut on the euro. Furthermore, a stronger euro could further depress import prices, exacerbating downward inflationary pressures. This point was repeatedly mentioned by Christine Lagarde at her press conference, sparking market concerns about the risk of a "low inflation, low growth" scenario in the eurozone.
Before the decision, the market had fully priced in the ECB's decision to hold interest rates steady, with the euro fluctuating narrowly against the dollar around 1.1680, reflecting traders' cautious stance. Following the decision, the euro quickly fell to 1.1664, signaling market dissatisfaction with the ECB's "ambiguous guidance." Compared to historical trends, the euro rose against both the dollar and the pound after the 25 basis point rate cut on June 5, 2025, demonstrating a positive market response to clear easing signals. The current shift in market sentiment stems primarily from two factors: first, the ECB's ambiguous statements on the future path of interest rates have failed to boost bullish confidence; second, external risks (such as the French political situation and tariff rhetoric) have exacerbated risk aversion, putting short-term pressure on the euro.
In the short term, the euro is likely to fluctuate between 1.1650 and 1.1700 against the dollar. The market will closely monitor the outcome of the Federal Reserve's interest rate meeting on September 18th. If the Fed cuts interest rates by 25 basis points as expected and Powell signals further easing, the dollar could weaken further, and the euro could rebound above 1.1700. However, if the Fed cuts less than expected, or if deteriorating political conditions in France lead to increased volatility in the eurozone bond market, the euro could test the support level of 1.1600. From a technical perspective, the 20-day moving average (around 1.1650) against the dollar will serve as key support; a break below this could lead to further declines to 1.1580.
In the medium to long term, the ECB's data-dependent strategy means the future path of interest rates is highly dependent on inflation and growth data. The downward revision of inflation forecasts to 1.7% in 2026 and core inflation to 1.8% in 2027 suggests the ECB may implement an insurance rate cut by the end of the year or next spring to prevent inflation from persistently falling below target. However, uncertainty surrounding the Eurozone's economic growth forecast (downgraded to 1.0% in 2026) and external risks (such as the situation in Russia and Ukraine and tariff rhetoric) may limit the euro's upside. Institutional analysts believe the euro is likely to remain in the 1.15-1.20-dollar range until the end of 2026 unless Eurozone fiscal stimulus (such as Germany's €500 billion special fund) effectively boosts economic confidence.
Overall, while the ECB's interest rate decision on September 11th met expectations, it failed to provide clear market direction, leading to a short-term decline in the euro. The divergence between institutional and retail investors reflects the market's complex balance between the eurozone's economic resilience and external risks. In the short term, expectations of a Fed rate cut and the political situation in France will be key factors influencing the euro's performance. In the medium to long term, eurozone economic fundamentals and the ECB's cautious policy will limit significant euro fluctuations. Investors should closely monitor data developments and the opportunities and risks presented by diverging global policies.
Following the announcement, the euro/dollar pair plummeted from 1.1684 to 1.1664, a drop of approximately 0.25%. German 10-year government bond yields remained stable at 2.66%. The market reaction was mild but bearish, reflecting investors' mixed feelings regarding the ECB's cautious stance. This article will analyze the shift in market sentiment following the decision, focusing on immediate market reactions, institutional and retail investor interpretations, and expectations of a Fed rate cut, and provide an outlook for the euro's future trajectory.
Market reaction: Euro falls in the short term as risk aversion rises
Following the announcement of the resolution, the euro quickly retreated against the dollar, falling from 1.1684 to 1.1664, a short-term fluctuation of approximately 20 pips. This suggests a bearish market reaction to the ECB's decision to maintain interest rates. Despite an upward revision to 1.2% in economic growth forecasts, the downward revision in inflation expectations and Lagarde's statement at the press conference that the economy is "data-dependent and does not pre-determine its path" failed to instill confidence in the market. Germany's 10-year government bond yield remained at 2.66%, indicating a relatively muted bond market reaction to the resolution, with investors focusing more on the balance between the Eurozone's economic resilience and external risks.
Real-time feedback indicated that prior to the decision, the market generally expected the ECB to maintain interest rates, but some traders were betting that Lagarde might send a clearer signal of easing. One institution stated before the decision, "We don't expect any surprises today. The focus will be on the updated economic forecasts, but we expect minimal changes." This view reflected the market's low expectations for the decision. However, following the announcement, the euro's short-term decline indicated a rapid exit from some long positions, shifting market sentiment from cautious optimism to a wait-and-see approach. In contrast, historical data shows that after the 25 basis point rate cut on April 17, 2025, the euro rose against the US dollar, reaching a high of 1.1478. This suggests that the weakening of the US dollar's creditworthiness and expectations of European fiscal stimulus supported the euro at the time. The euro's current rapid decline may reflect market disappointment with the ECB's "hold-on" stance and concerns about future below-target inflation.
Interpretation by institutions and retail investors: Divergence emerges, with cautious sentiment dominating
Interpretation: Institutional analysis generally focused on the ECB's data-dependent strategy and the uncertainty surrounding external risks. Leading institutions noted that the ECB's decision to maintain interest rates reflects its confidence in the resilience of the Eurozone economy. In particular, the upward revision of its 2025 economic growth forecast to 1.2% reflects optimism about private consumption and German fiscal spending. However, inflation forecasts were lowered to 1.7% in 2026 and 1.9% in 2027, with core inflation at just 1.8% in 2027, suggesting a weakening of inflationary stickiness and increasing the likelihood of future "insurance rate cuts." Institutions estimate that the market's probability of a rate cut before next spring is 50-60%, aligning with expectations of easing by the Federal Reserve. The ECB reiterated, "We are keeping our key interest rates unchanged as inflation is expected to stabilize around our 2% target." This statement was interpreted by institutions as the ECB's intention to extend its wait-and-see approach and avoid prematurely committing to easing.
Retail investor interpretation: Investor sentiment was more divided. Some expressed disappointment with the euro's short-term decline, believing that Lagarde's failure to provide a clearer signal of easing at her press conference had left the market without direction. One trader predicted before the decision, "The prevailing market view is that the ECB will wait and see, awaiting the Federal Reserve's September meeting before making a decision." This prediction was consistent with the decision, but retail investors reacted more emotionally to the euro's decline, with some attributing it to "the market's premature reaction to expectations of a Fed rate cut." Others pointed out that political instability in France and risk aversion fueled by Trump's tariff rhetoric may have exacerbated the euro's selling pressure. In contrast, after the July 24, 2025, EUR/USD exchange rate saw a brief rally to 1.1756, indicating a higher market acceptance of stable interest rates. Currently, retail investor sentiment favors short-term risk aversion, believing the euro could face further pressure.
Fed rate cut expectations and market sentiment changes
The impact of the Federal Reserve's monetary policy outlook on the euro's performance cannot be ignored. Market consensus suggests the Fed will cut interest rates by 25 basis points at its September 17-18 meeting, with CME data indicating an 84% probability of a rate cut. Goldman Sachs and other institutions predict the Fed will cut rates three to four times in 2025, potentially lowering the terminal rate to 3%-3.75%. This expectation should theoretically weaken the dollar and boost the euro, but the euro's decline following the decision suggests the market is more focused on internal risks within Europe. Political unrest in France has pushed up French bond yields, and this, coupled with risk aversion fueled by Trump's tariff rhetoric, may offset the potential positive impact of the Fed's rate cut on the euro. Furthermore, a stronger euro could further depress import prices, exacerbating downward inflationary pressures. This point was repeatedly mentioned by Christine Lagarde at her press conference, sparking market concerns about the risk of a "low inflation, low growth" scenario in the eurozone.
Before the decision, the market had fully priced in the ECB's decision to hold interest rates steady, with the euro fluctuating narrowly against the dollar around 1.1680, reflecting traders' cautious stance. Following the decision, the euro quickly fell to 1.1664, signaling market dissatisfaction with the ECB's "ambiguous guidance." Compared to historical trends, the euro rose against both the dollar and the pound after the 25 basis point rate cut on June 5, 2025, demonstrating a positive market response to clear easing signals. The current shift in market sentiment stems primarily from two factors: first, the ECB's ambiguous statements on the future path of interest rates have failed to boost bullish confidence; second, external risks (such as the French political situation and tariff rhetoric) have exacerbated risk aversion, putting short-term pressure on the euro.
Future Trend Outlook
In the short term, the euro is likely to fluctuate between 1.1650 and 1.1700 against the dollar. The market will closely monitor the outcome of the Federal Reserve's interest rate meeting on September 18th. If the Fed cuts interest rates by 25 basis points as expected and Powell signals further easing, the dollar could weaken further, and the euro could rebound above 1.1700. However, if the Fed cuts less than expected, or if deteriorating political conditions in France lead to increased volatility in the eurozone bond market, the euro could test the support level of 1.1600. From a technical perspective, the 20-day moving average (around 1.1650) against the dollar will serve as key support; a break below this could lead to further declines to 1.1580.
In the medium to long term, the ECB's data-dependent strategy means the future path of interest rates is highly dependent on inflation and growth data. The downward revision of inflation forecasts to 1.7% in 2026 and core inflation to 1.8% in 2027 suggests the ECB may implement an insurance rate cut by the end of the year or next spring to prevent inflation from persistently falling below target. However, uncertainty surrounding the Eurozone's economic growth forecast (downgraded to 1.0% in 2026) and external risks (such as the situation in Russia and Ukraine and tariff rhetoric) may limit the euro's upside. Institutional analysts believe the euro is likely to remain in the 1.15-1.20-dollar range until the end of 2026 unless Eurozone fiscal stimulus (such as Germany's €500 billion special fund) effectively boosts economic confidence.
Overall, while the ECB's interest rate decision on September 11th met expectations, it failed to provide clear market direction, leading to a short-term decline in the euro. The divergence between institutional and retail investors reflects the market's complex balance between the eurozone's economic resilience and external risks. In the short term, expectations of a Fed rate cut and the political situation in France will be key factors influencing the euro's performance. In the medium to long term, eurozone economic fundamentals and the ECB's cautious policy will limit significant euro fluctuations. Investors should closely monitor data developments and the opportunities and risks presented by diverging global policies.
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