The European Central Bank's interest rate remains unchanged, but the euro has fallen first. Has the release of the US CPI successfully "saved the situation"?
2025-09-11 22:00:54
The European Central Bank (ECB) announced on Thursday (September 11) that it would maintain key interest rates unchanged following its September monetary policy meeting, in line with market expectations. The decision maintains the main refinancing operation rate, the marginal lending facility rate, and the deposit facility rate at their current levels of 2.15%, 2.4%, and 2%, respectively. The ECB also raised its full-year GDP forecast, but lowered its 2026 GDP forecast. The euro fell 0.15% against the US dollar to -0.26%. However, with the US CPI meeting expectations, favorable inflation data could alleviate concerns about a Fed rate cut. The US dollar index fell, while the euro rose. Currently, the euro is trading at 1.1734, up 0.36% against the US dollar.
The high level of CPI in August confirmed the stubborn inflationary pressure, and the core CPI remained stable at 3.1% for three consecutive months, highlighting the potential stickiness of inflation.
Housing costs rose 0.4% month-over-month, primarily driving the increase. The annualized rate of the food CPI rose to 3.2%, while the energy CPI turned positive, reaching 0.2%. Among core commodities, the annualized rate of the used car CPI soared to 6%, while the annualized rate of the new car CPI rose to 0.7%, indicating increasing pressure on the demand side. Labor market slack intensified: Initial unemployment claims surged to 263,000 in August. Combined with the 911,000 non-farm payroll figures that were overestimated for the past 12 months and the stagnation of job growth in August, a clear cooling trend in employment is evident.
Although the CPI data was in line with expectations, it also showed the pressure of insufficient demand. Combined with the weak employment data, it suppressed the rebound of the US dollar and the euro took advantage of the situation to rise.
ECB President Christine Lagarde stated that the deflationary process has ended. ECB staff forecasts show that current inflation is close to the medium-term target of 2%. The ECB's assessment of the inflation outlook has not changed substantially, and the inflation trend is basically consistent with the June forecast framework.
For core inflation, which excludes energy and food, the ECB expects it to average 2.4% in 2025, falling to 1.9% in 2026 and further to 1.8% in 2027.
The ECB will adopt a data-driven, meeting-by-meeting approach to determine the appropriate monetary policy stance. The ECB's interest rate decisions will be based on the inflation outlook and associated risk assessments, taking into account the latest economic and financial data, core inflation trends, and the effectiveness of monetary policy transmission.
The ECB will not pre-commit to a specific interest rate path. The portfolios of the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP) are being reduced at a smooth and predictable pace, as the Eurosystem has stopped reinvesting principal from maturing securities. The ECB's latest inflation forecasts are: 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027.
The ECB's latest core inflation forecasts are: 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027. Meanwhile, the eurozone's Harmonized Index of Consumer Prices (HICP) rose 2.1% year-on-year in August, compared to 2.0% in July. This reading not only exceeded market expectations of 2.0%, but also exceeded the ECB's 2% inflation target.
The ECB's latest economic growth forecast: raised to 1.2% in 2025. The ECB slightly lowered its economic growth forecast for 2026 to 1.0%, while maintaining its growth forecast for 2027 at 1.3%.
Since suspending interest rate cuts in July, the United States and the European Union have reached a trade agreement, which stipulates that a uniform 15% tariff will be imposed on EU goods imported into the United States.
Eurozone gross domestic product (GDP) data showed that the economy grew by 0.1% quarter-on-quarter in the second quarter (ending June), compared with 0.6% in the previous quarter, exceeding market expectations of "zero growth".
Analysts at Brown Brothers Harriman (BBH) pointed out: "The swap market has fully priced in a 75% probability of a 25 basis point rate cut in the next 12 months." In contrast, most economists believe that the European Central Bank has ended its interest rate cut process.
In addition, industry experts and analysts said that ECB President Christine Lagarde and her core team have set a high threshold for future interest rate cuts - only when the economic growth outlook deteriorates significantly and a persistent deflationary trend emerges will the ECB be prompted to restart the easing cycle.
"The press conference focused on economic resilience and potentially signaled easing of trade uncertainty," analysts at TD Securities said.
TDS analysts further added: "When asked about near-term risk factors, President Lagarde hinted that the Governing Council is ready to respond with policies, but did not specify the path of future interest rate cuts."
On the eve of the ECB's policy risk event, the euro remained within its highest range against the US dollar since late July. Growing market expectations of diverging monetary policy outlooks between the ECB and the US Federal Reserve (Fed) are supporting euro bulls.
Meanwhile, France's parliament voted on Monday to dismiss Prime Minister Francois Bayrou and his minority government over its fiscal reform plans, leaving President Emmanuel Macron to search for his fifth prime minister in less than two years.
However, as the euro zone's second-largest economy, France's current intensifying political crisis is not expected to have any substantial impact on the ECB's decision-making and forecasts this week.
In July this year, European Central Bank President Christine Lagarde said that the central bank is in a "policy range suitable for maintaining interest rates and observing changes in data."
If the subsequent ECB Monetary Policy Statement (MPS) conveys the same stance as President Lagarde - that is, maintaining a cautious attitude towards the outlook for monetary policy and showing that inflation is well under control, it may provide additional momentum for the current upward trend of EUR/USD.
Some upward revisions to inflation and economic growth for 2025 could be interpreted by the market as a hawkish signal, further boosting the euro against the dollar. Conversely, if the quarterly staff forecasts unexpectedly lower growth and inflation expectations for this year, the euro could face significant selling pressure against the dollar.
In addition, if the ECB does not release any clear clues on the direction of the next interest rate change, the euro may also trigger a downward adjustment against the US dollar.
Analyst Dhwani pointed out that the euro is testing the key 21-day simple moving average (SMA) support at 1.1678 against the US dollar; but the 14-day relative strength index (RSI) is firmly above 50, indicating that despite the slight pullback from the two-month high, the upward momentum of the currency pair has not changed.
On the upside, if bulls break through the 9-week high of 1.1780, the next bullish target will be the July high of 1.1830. Further upside, the 1.1900 round number will become a key market focus. Conversely, if the exchange rate continues to fall below the support area of the intersection of the 21-day SMA and the 50-day SMA, a new round of decline may begin, targeting the 1.1600 mark. The August 27 low of 1.1574 may become a strong support level for bears to break through.
(Euro/USD daily chart, source: Yihuitong)
At 21:55 Beijing time, the euro is trading at 1.1735 against the US dollar.
Impact of US CPI data
The high level of CPI in August confirmed the stubborn inflationary pressure, and the core CPI remained stable at 3.1% for three consecutive months, highlighting the potential stickiness of inflation.
Housing costs rose 0.4% month-over-month, primarily driving the increase. The annualized rate of the food CPI rose to 3.2%, while the energy CPI turned positive, reaching 0.2%. Among core commodities, the annualized rate of the used car CPI soared to 6%, while the annualized rate of the new car CPI rose to 0.7%, indicating increasing pressure on the demand side. Labor market slack intensified: Initial unemployment claims surged to 263,000 in August. Combined with the 911,000 non-farm payroll figures that were overestimated for the past 12 months and the stagnation of job growth in August, a clear cooling trend in employment is evident.
Although the CPI data was in line with expectations, it also showed the pressure of insufficient demand. Combined with the weak employment data, it suppressed the rebound of the US dollar and the euro took advantage of the situation to rise.
ECB updates inflation forecasts and remains confident about inflation
ECB President Christine Lagarde stated that the deflationary process has ended. ECB staff forecasts show that current inflation is close to the medium-term target of 2%. The ECB's assessment of the inflation outlook has not changed substantially, and the inflation trend is basically consistent with the June forecast framework.
For core inflation, which excludes energy and food, the ECB expects it to average 2.4% in 2025, falling to 1.9% in 2026 and further to 1.8% in 2027.
The ECB will adopt a data-driven, meeting-by-meeting approach to determine the appropriate monetary policy stance. The ECB's interest rate decisions will be based on the inflation outlook and associated risk assessments, taking into account the latest economic and financial data, core inflation trends, and the effectiveness of monetary policy transmission.
The ECB will not pre-commit to a specific interest rate path. The portfolios of the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP) are being reduced at a smooth and predictable pace, as the Eurosystem has stopped reinvesting principal from maturing securities. The ECB's latest inflation forecasts are: 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027.
The ECB's latest core inflation forecasts are: 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027. Meanwhile, the eurozone's Harmonized Index of Consumer Prices (HICP) rose 2.1% year-on-year in August, compared to 2.0% in July. This reading not only exceeded market expectations of 2.0%, but also exceeded the ECB's 2% inflation target.
ECB updates economic forecasts
The ECB's latest economic growth forecast: raised to 1.2% in 2025. The ECB slightly lowered its economic growth forecast for 2026 to 1.0%, while maintaining its growth forecast for 2027 at 1.3%.
Since suspending interest rate cuts in July, the United States and the European Union have reached a trade agreement, which stipulates that a uniform 15% tariff will be imposed on EU goods imported into the United States.
Eurozone gross domestic product (GDP) data showed that the economy grew by 0.1% quarter-on-quarter in the second quarter (ending June), compared with 0.6% in the previous quarter, exceeding market expectations of "zero growth".
Analyst Comments
Analysts at Brown Brothers Harriman (BBH) pointed out: "The swap market has fully priced in a 75% probability of a 25 basis point rate cut in the next 12 months." In contrast, most economists believe that the European Central Bank has ended its interest rate cut process.
In addition, industry experts and analysts said that ECB President Christine Lagarde and her core team have set a high threshold for future interest rate cuts - only when the economic growth outlook deteriorates significantly and a persistent deflationary trend emerges will the ECB be prompted to restart the easing cycle.
"The press conference focused on economic resilience and potentially signaled easing of trade uncertainty," analysts at TD Securities said.
TDS analysts further added: "When asked about near-term risk factors, President Lagarde hinted that the Governing Council is ready to respond with policies, but did not specify the path of future interest rate cuts."
The impact of the ECB meeting on the EUR/USD exchange rate
On the eve of the ECB's policy risk event, the euro remained within its highest range against the US dollar since late July. Growing market expectations of diverging monetary policy outlooks between the ECB and the US Federal Reserve (Fed) are supporting euro bulls.
Meanwhile, France's parliament voted on Monday to dismiss Prime Minister Francois Bayrou and his minority government over its fiscal reform plans, leaving President Emmanuel Macron to search for his fifth prime minister in less than two years.
However, as the euro zone's second-largest economy, France's current intensifying political crisis is not expected to have any substantial impact on the ECB's decision-making and forecasts this week.
In July this year, European Central Bank President Christine Lagarde said that the central bank is in a "policy range suitable for maintaining interest rates and observing changes in data."
If the subsequent ECB Monetary Policy Statement (MPS) conveys the same stance as President Lagarde - that is, maintaining a cautious attitude towards the outlook for monetary policy and showing that inflation is well under control, it may provide additional momentum for the current upward trend of EUR/USD.
Some upward revisions to inflation and economic growth for 2025 could be interpreted by the market as a hawkish signal, further boosting the euro against the dollar. Conversely, if the quarterly staff forecasts unexpectedly lower growth and inflation expectations for this year, the euro could face significant selling pressure against the dollar.
In addition, if the ECB does not release any clear clues on the direction of the next interest rate change, the euro may also trigger a downward adjustment against the US dollar.
Technical Analysis
Analyst Dhwani pointed out that the euro is testing the key 21-day simple moving average (SMA) support at 1.1678 against the US dollar; but the 14-day relative strength index (RSI) is firmly above 50, indicating that despite the slight pullback from the two-month high, the upward momentum of the currency pair has not changed.
On the upside, if bulls break through the 9-week high of 1.1780, the next bullish target will be the July high of 1.1830. Further upside, the 1.1900 round number will become a key market focus. Conversely, if the exchange rate continues to fall below the support area of the intersection of the 21-day SMA and the 50-day SMA, a new round of decline may begin, targeting the 1.1600 mark. The August 27 low of 1.1574 may become a strong support level for bears to break through.
(Euro/USD daily chart, source: Yihuitong)
At 21:55 Beijing time, the euro is trading at 1.1735 against the US dollar.
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