Lagarde Stays Cautious After ECB Rate Cut, EUR/USD Faces Pressure from Trade

The ECB also downgraded its 2026 inflation outlook, citing weaker near-term economic prospects and persistent global trade risks. Services inflation, previously stubborn, has cooled significantly. Still, Lagarde pointed to bolstering factors such as increased EU defense and infrastructure spending that could support medium-term growth.

U.S. Trade Policy Poses Risk to Eurozone Growth

Concerns over U.S. trade tariffs weighed heavily on the ECB’s forward assessment. Trump’s renewed protectionist stance is expected to hit euro area exports and dampen business investment. While manufacturing has seen short-term gains from stockpiling, services activity is slowing. Lagarde acknowledged these risks, adding that a further escalation of trade tensions could lead to growth and inflation undershooting projections.

The stronger euro and declining energy prices also reinforce disinflationary pressures, reinforcing expectations that the ECB’s easing cycle may slow. Some economists warn that inflation could drop below the target next year, reviving memories of the pre-pandemic era of persistent undershooting.

Market Reaction and Investor Positioning

Market participants are now pricing in a high likelihood of a rate pause in July. Analysts from Goldman Sachs and Schroders expect limited further cuts, with divergence in views on whether one or two more reductions are feasible this year. The ECB’s cautious stance has been welcomed by bond markets, with traders turning their attention to fiscal developments and geopolitical risks.

Outlook: EUR/USD Neutral with Downside Risk