ECB Preview: no action expected as economy settles

The European Central Bank meets this week against a backdrop of moderating inflation, subdued growth, and cautious optimism in global markets. While no policy change is expected, investors will be parsing President Christine Lagarde’s tone and guidance for clues about the pace and timing of future rate cuts.

Policy steady, outlook softening

After delivering a series of rate cuts earlier this year, the ECB is widely expected to hold rates steady at this meeting. The eurozone’s inflation trajectory continues to drift lower, but progress has been uneven. Core inflation has eased, yet wage growth remains sticky — a reminder that the ECB is not ready to declare victory just yet. With GDP growth still hovering near stagnation and business surveys pointing to lingering weakness in manufacturing, the Governing Council has little incentive to move aggressively in either direction.

With markets pricing in no more cuts before year-end, it is unlikely that Lagarde’s communication can provide much further insight at this time. The ECB will likely emphasize a data-dependent stance, reaffirming its commitment to bringing inflation back to target while recognizing the improving disinflation trend. Investors will watch closely for any shift in tone that suggests policymakers are more comfortable with the inflation outlook, which could open the door to further easing in mid 2026.

Regional divergence and market implications

Policymakers must also navigate diverging national conditions: Germany remains sluggish, while southern Europe has shown more resilience. This patchwork recovery complicates a one-size-fits-all policy path. Meanwhile, the euro’s recent softness—driven partly by expectations of looser policy—has provided modest relief for exporters but could reignite imported inflation if it continues to weaken significantly.

A “steady and cautious” ECB is likely to keep markets calm, reinforcing the broader risk-on sentiment that has lifted global equities. Bond yields may remain anchored if Lagarde leans dovish, while any hint of patience on rate cuts could support the euro in the near term. It is likely that this meeting reinforces the outlook that the ECB is still on an easing path, but one measured by data, not by calendar. Because of this, there is little expectation that the meeting will be a key risk event for markets. The ECB will aim to balance patience with reassurance — signalling that the worst of the inflation fight is behind them, even if the journey to normalization is far from over.

Reinforcing the outlook that cutting rates is done for now could help EUR/USD regain some upside at a time when the Federal Reserve is expected to continue easing over the coming months. The pair has faced renewed downside pressure over the past two months as the dollar has recovered some ground, but the momentum has flattened out in recent weeks, offering support around the 1.16 level. For now, a break above 1.1670 is needed to reinforce the bullish outlook before aiming at breaking past 1.17.

EUR/USD daily chart

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