ECB: Time-varying sensitivity to Euro appreciation

The euro has appreciated against the US dollar (and in effective terms) since the ECB began its easing cycle in June 2024. To date, the ECB has reduced its monetary policy rates by 200 basis points, while the euro has gained approximately 9% against the US dollar (and over 12% since January 2025). At the same time, growth and interest rate prospects in the US appear more favourable than those in the euro area . This configuration certainly explains that several members of the ECB Governing Council have expressed concerns regarding the e uro's appreciation. A n appreciation reflecting better economic perspectives in the Euro area than abroad is more easily tolerated by the ECB than an appreciation caused by a ‘flight-to-quality ’ phenomenon. By decomposing the main drivers of exchange rate changes, we can explain the ECB's asymmetric consideration of the exchange rate over time . O ur findings suggest that further appreciation of the Euro—both against the US dollar and in effective terms—may prompt the ECB Governing Council to consider another monetary policy rate cut, particularly if this appreciation is primarily driven by external developments, such as a dovish US Federal Reserve. Consequently, we maintain our view that the ECB is likely to decide on a final policy rate cut of 25 basis points at its December meeting. Communication – Starting this week, we are changing our ' Special Report ' into ' EMEA Macro Insights ' which will provide in-depth economic analyses. Similarly, our ' Data Snap ' will become the ' EMEA Macro Snapshot ', offering a shorter analysis related to recent events. A similar name harmonization will be applied to our US and La tA m publications. As far as EMEA Macro Insights are concerned, they will now be published every Thursday. Happy back to school to everyone.