Europe Catches Its Breath: ECB Pauses as Economic Momentum Builds and Trade Deal Hopes Stir

The European Central Bank held interest rates steady on Thursday, opting for caution as tentative signs of economic momentum emerged across the eurozone. The decision to pause — with the deposit rate at 2.00%, main refinancing operations at 2.15%, and the marginal lending facility at 2.40% — came as no surprise to markets. But what did catch attention was the unusually brief policy statement, which offered little insight into the central bank’s deliberations. That brevity suggests the Governing Council is playing its cards close to the chest, preferring to let the incoming data speak for itself.

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That data, notably the July flash Purchasing Managers’ Index (PMI) figures, offered a dose of cautious optimism. The eurozone composite PMI rose to 51.0, the fastest pace in nearly a year, signaling expanding private-sector activity. Services led the way, with the index climbing to 51.2 from 50.5 in June — a six-month high — while manufacturing, though still below the 50 threshold that marks contraction, ticked up to 49.8, a 36-month high. New orders in the services sector rose for the first time in six months, offsetting ongoing weakness in manufacturing demand.

Country-level data revealed a nuanced recovery. Germany’s economy showed signs of resilience, with its services sector returning to growth and optimism among businesses reaching a 14-month high. The German composite PMI landed at 50.3, with services at 50.1 and manufacturing at 49.2. Output growth and new business were both modestly positive, and inflationary pressures continued to ease, especially in the services sector. In contrast, France remained under pressure. The French composite PMI edged up to 49.6 but remained in contraction for an 11th consecutive month. The data showed shrinking new orders, weakened business confidence, and falling employment, particularly in the service sector. Political uncertainty — notably around Prime Minister François Bayrou’s austerity package — continues to weigh heavily on French sentiment.

The ECB’s policy decision comes as inflation in the eurozone continues to cool. The statement noted that price pressures have eased further, with domestic wage growth slowing. Input cost inflation in July was the weakest in nine months, and firms raised output prices at the same modest pace as in June. Manufacturing output prices were flat, ending a two-month run of declines, while service sector charge inflation softened further. All of this reinforces the notion that disinflation is taking hold — particularly in the service sector, which had been a persistent inflationary hotspot.

Still, the external environment remains fraught. Export demand continued to decline in July, with new export orders contracting at a faster pace than the previous month. Orders from abroad — including intra-eurozone trade — have now fallen for 28 consecutive months. Though manufacturing production expanded slightly, the picture for global trade remains clouded by rising protectionism.

And that’s where Thursday’s other major narrative enters the fold: the prospect of a U.S.–EU trade deal. Following months of retaliatory tariffs and tit-for-tat rhetoric, both sides appear close to a compromise. Reports suggest that the U.S. and EU are working toward a 15% tariff agreement on a wide array of goods — significantly less than the 25%–30% levels previously floated. Auto manufacturers, in particular, would breathe a sigh of relief, given the sector’s vulnerability to cross-border taxes. Aircraft and medical device exemptions are reportedly part of the negotiations, and European officials have prepared a €93 billion counter-tariff package should talks break down.

The implications of such a deal are substantial. A 15% compromise would remove much of the uncertainty hanging over European exporters and give firms the clarity they need to make forward-looking investment decisions. Markets responded positively: the Euro Stoxx 600 index touched six-week highs, while shares of European auto and industrial companies rallied. The euro weakened modestly — likely a sign of improved global risk appetite rather than euro-specific concerns — and bond yields edged higher as investors pared back bets on further near-term easing by the ECB.

That said, Lagarde and company are far from declaring victory. The policy outlook remains highly data-dependent, and the Governing Council continues to emphasize a meeting-by-meeting approach. There is no commitment to further cuts, nor any indication that tightening is off the table entirely. The data will dictate the path forward, and Thursday’s press conference with President Lagarde will be parsed closely for any inflection in tone.

Meanwhile, structural differences within the eurozone persist. Germany appears to be on the cusp of a more durable recovery, aided by modest fiscal expansion and improved business sentiment. France, conversely, is grappling with political discord and waning domestic demand. The divergence may create challenges for monetary policy transmission, especially if regional inflation and growth trends continue to diverge.

Still, the broader takeaway is one of cautious optimism. The eurozone economy appears to be stabilizing, with the services sector regaining its footing and manufacturing approaching equilibrium. Inflation is receding without a collapse in demand — a goldilocks outcome for central bankers. The looming trade détente between the U.S. and EU, if finalized, would further solidify the foundation for recovery by reducing uncertainty and improving terms of trade.

In the short term, much depends on whether the ECB views these developments as durable or fleeting. But for now, policymakers have hit pause — not out of indecision, but out of recognition that the worst may be behind them, and that the next move must be carefully measured.