Eurozone June Decision Preview: Can a Rate Cut Reverse the Euro's Strength? How to View Multi-Currency Exchange Rates

The European Central Bank will announce a new interest rate decision on June 5th, and the market’s focus is already clear—does this mean the beginning of euro depreciation?

Inflation Data Supports Further Easing

The latest economic data paves the way for rate cuts. The harmonized CPI YoY preliminary figure for the Eurozone in May fell to 1.9%, hitting an eight-month low and first falling below the ECB’s 2% inflation target. Against this backdrop, market consensus on the ECB lowering inflation and economic growth expectations has largely been reached.

According to LSEG data, investors have fully priced in the 25 basis point rate cut on June 5th. More importantly, the market is also preparing for a second rate cut later this year, which will gradually bring the ECB’s deposit rate down from the current 2.25% to around 1.75%. Over the past 12 months, the ECB has implemented seven consecutive rate cuts, and there is no sign of easing the policy stance.

Rate Cut Expectations ≠ Euro Depreciation

At first glance, consecutive rate cuts should weaken the euro, but the market’s actual reaction has not been so straightforward. U.S. Trust Bank’s analysis points out that in the context of a generally weakening dollar, the euro has shown resilience. Even if the ECB cuts rates as scheduled, the euro is unlikely to experience significant declines.

Several strategists’ views are more specific: the EUR/USD exchange rate will continue to fluctuate within the 1.10-1.15 dollar range. The logic behind this range-bound consolidation is that rate cut expectations have already been priced in by the market, and investors automatically buy euros when the exchange rate falls, forming an effective support level.

The Dollar’s Movement Becomes a Decisive Factor

Danske Bank’s analysis team presents another key dimension: the euro’s subsequent performance depends on whether the dollar can be supported by fundamentals. Substantial improvement in economic data is a prerequisite for the dollar to regain strength. As long as the U.S. economic fundamentals do not show significant improvement, the EUR/USD is expected to continue rising.

This also means that monitoring the euro to RMB exchange rate requires simultaneously observing the strength of the dollar. The ECB’s rate cut policy is just one aspect of exchange rate fluctuations; divergence in global monetary policies, risk sentiment, and economic data from various countries are deeper factors that determine long-term exchange rate trends.

How Should Investors Respond

For traders, the key is to recognize that a single central bank’s rate cut decision does not necessarily lead to corresponding currency depreciation. The outlook for the EUR/RMB exchange rate, as well as the performance of the euro against other major currencies, needs to be understood within a broader macroeconomic context. Although the current rate-cut cycle seems bearish for the euro, market pricing has largely absorbed this factor. The real trading opportunities often arise where the expectations differ the most.