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The EURUSD has largely been trending sideways over the last couple of months, clearly looking for a catalyst to break the mould. Rate decisions are often big events that can change a currency’s direction, and the ECB meeting right after the FOMC’s could provide the one-two punch the market needs. That is, if the central bank delivers a surprise.

With the Euro Area managing meagre growth and inflation on target, the consensus among economists is that the ECB will keep rates unchanged. Not just at this upcoming meeting, but the next one in December as well as in January as well. So, what could surprise the market and jolt it into action is if the ECB communicates that a rate cut could be coming along.
 

Stabilizing is not Growth

After cutting rates eight times since the middle of last year, it seems the Central Bank has hit the sweet spot for interest rates. Even ECB President Christine Lagarde said at the last meeting that interest rates and inflation are “in a good place”. Which likely means that there has to be some expected change in the trajectory to shake the ECB into cutting rates. The ECB said earlier in the year that it expected inflation to tick up a little bit in the final quarter of 2025 to return to target later next year.

However, the economy isn’t performing as well as might be hoped. Economists have said that the Euro Area economy is “stabilizing”, which is good news in the sense that it is not expected to contract. But, it’s also not taking off. And that can be a problem not just for the ECB, but the Euro as well.
 

The End of the Upward Slope

The Euro gained substantially in the first half amid strong cash flows from the US into Europe. Investors were worried about the impact of unpredictable policies from the Trump Administration on growth, including tariffs. Europe offered comparable stability, and a program of increased government spending that was supposed to goose the economy as the continent had support its defense. This influx of cash to buy European assets helped to appreciate the Euro. But, those flows have faltered of late, with Blackrock CEO Larry Fink pointing out on Monday that investment flows are now reversing and heading back to the US.

The main reason being that the expected economic growth hasn’t materialized as European governments struggle to agree on spending criteria. Recent PMI’s have disappointed, suggesting the Euro Area is headed for continued slow growth at least through the winter. For monetary policy, this means that inflation could slow down faster than anticipated. Economic growth typically goes hand-in-hand with inflation. If growth is faltering, then the ECB might come around to the idea of easing to keep inflation from falling below target.
 

How It Will Affect the Euro

Traders will be looking closely at ECB President Christine Lagarde’s post-rate decision press conference for clues about what happens next. If she reiterates her line about interest rates being in a good place, then the market might shrug off the rate decision.

On the other hand, if she expresses concern about the state of economic growth, this could cause traders to start pricing in a rate cut. The initial reaction from the Euro might be to weaken, as is normal with lower interest rates. But, a rate cut would presumably prop up the Eurozone economy, and entice back the capital flows that pushed the Euro higher earlier this year.

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