Euro Holds Steady as ECB Signals Rate-Cutting Pause Amid Sticky Inflation

The European Central Bank (ECB) is cautiously optimistic about the eurozone's inflation outlook, with ECB Governing Council member Martins Kazaks stating that inflation is currently near the 2% target but that "some pick-up in momentum recently" has been observed. Kazaks emphasized the need for continued monitoring of core inflation and services prices, which remain sticky despite the central bank's broader policy stance. The ECB president, Christine Lagarde, echoed this sentiment, suggesting that the bank may revise its growth projections upward in its next decision cycle due to the region's unexpected resilience to trade tensions and global uncertainty.

Market reactions to the ECB's cautious stance have been mixed. The EUR/GBP cross fell slightly below 0.8750 as traders weighed in on the central bank's data-dependent approach and the Bank of England's own tightening signals. Meanwhile, the euro has held steady against the dollar, supported by expectations that the ECB has completed its rate-cutting cycle for now. Investors remain keenly focused on how the ECB will balance its inflation-targeting mandate with the broader economic risks posed by fiscal expansion in key eurozone economies.

The ECB's next policy decision in December is likely to be pivotal. Kazaks highlighted the importance of monitoring fiscal policy developments, noting that higher budget deficits and government debt levels could complicate monetary policy over the coming years. Lagarde, however, reiterated that the ECB will maintain a "meeting-by-meeting" approach and emphasized that monetary policy remains in a "good place" with rates near neutral levels. The central bank's ability to navigate the delicate balance between inflation control and growth support will be closely watched in the months ahead.

Inflation Projections and Policy Path

The ECB's current inflation target of 2% remains a key anchor for its policy decisions. Kazaks noted that while headline inflation has cooled, the persistence of services inflation-driven by wage growth and structural imbalances-means the central bank cannot relax its vigilance. This aligns with broader market expectations that the ECB will resist further rate cuts in the near term, even as inflation trends lower.

Lagarde's recent comments at a Financial Times event suggested that the ECB may raise its growth forecasts again in December, citing the eurozone's resilience to geopolitical and trade-related shocks. This follows a similar upgrade in September, when the bank acknowledged stronger-than-expected services sector performance and a robust labor market. However, the central bank's mandate remains firmly inflation-focused, and any upward revisions to growth will likely be tempered by ongoing concerns over global economic stability.

Market Reactions and Currency Dynamics

The EUR/GBP cross has been particularly sensitive to ECB and BoE policy signals. After dipping below 0.8750, the pair reflects traders' expectations of divergent policy paths between the two central banks. The BoE's recent hawkish comments, particularly from Deputy Governor Clare Lombardelli, have added short-term support to the pound. However, market pricing still anticipates a 25-basis-point cut by the BoE in December, which could weigh on the pound and give the cross some breathing room.

In the broader forex market, the euro has benefited from a more dovish-than-expected Fed policy outlook and a resilient eurozone economy. The ECB's cautious stance has helped maintain investor confidence in the single currency, particularly as the bank signals that it is done cutting rates for now. This dynamic has kept the EUR/USD pair stable, despite ongoing macroeconomic uncertainty in the global economy.

Policy Challenges and Future Outlook

The ECB faces a complex policy environment as it moves into 2026. Kazaks pointed to the risks posed by fiscal policy, particularly in Germany, where ongoing debates over the implementation of the Draghi report's recommendations could create uncertainty. Additionally, the effectiveness of fiscal stimulus in the eurozone remains a critical unknown. While short-term growth expectations have improved, the ECB must remain vigilant against medium-term risks from geopolitical tensions, regulatory changes, and the ongoing energy transition.

The central bank's ability to manage these competing demands will shape its policy trajectory in the coming year. While inflation is near the 2% target, the ECB is unlikely to declare victory until it sees a sustained period of price stability. This approach, combined with a data-dependent decision-making process, suggests that policy shifts will continue to be driven by incoming economic data rather than pre-set assumptions.