Euro Holds Near Lows as German Inflation Data Fuels ECB Rate-Cut Bets

The euro remained subdued against the US dollar on Tuesday, as investors digested the latest German inflation figures that pointed to easing price pressures, reinforcing expectations for further monetary policy easing by the European Central Bank (ECB).

German Inflation Data Signals Cooling Price Pressures

Germany’s preliminary inflation rate for May came in at 2.4% year-on-year, matching economist forecasts and down from April’s 2.6% reading, according to data released by the Federal Statistical Office (Destatis). On a harmonized basis, which is comparable across the eurozone, inflation stood at 2.8%, also easing from the previous month.

The slowdown was largely driven by a decline in energy prices, which fell by 1.1% year-on-year, while food prices rose at a slower pace of 1.3%. Core inflation, which excludes volatile food and energy components, remained sticky at 3.0%, but the overall trend suggested that price pressures are gradually abating.

Market Reaction and EUR/USD Dynamics

Following the data release, the euro traded near $1.0850, hovering close to its lowest level in over two weeks. The single currency has struggled to gain traction as investors increasingly price in the likelihood of an ECB rate cut at the upcoming policy meeting in June.

According to money market pricing, there is now a greater than 80% probability of a 25-basis-point cut by the ECB, up from roughly 70% a week ago. This shift in expectations has weighed on the euro, as lower interest rates typically reduce a currency’s appeal to yield-seeking investors.

ECB Policy Outlook and Divergence with the Fed

The ECB has signaled its readiness to begin easing monetary policy, with several policymakers endorsing a rate cut at the June 6 meeting, provided that inflation continues to move toward the 2% target. In contrast, the US Federal Reserve has maintained a more cautious stance, with officials emphasizing the need for sustained evidence that inflation is cooling before considering rate reductions.

This policy divergence is a key driver of EUR/USD movements. While the Fed has kept its benchmark rate at a 23-year high of 5.25%-5.50% since July, the ECB has held its deposit rate at a record 4.00% since September. If the ECB cuts rates while the Fed remains on hold, the interest rate differential would favor the dollar, potentially pushing EUR/USD lower.

Implications for the Eurozone Economy

The cooling inflation data provides some relief for the eurozone’s economy, which has been grappling with sluggish growth and weak manufacturing activity. Lower inflation could boost real household incomes and support consumption, but it also underscores the fragility of the recovery.

Analysts note that while the ECB is likely to begin its easing cycle, the pace of further cuts will depend on incoming data, particularly wage growth and services inflation, which remain elevated. A premature or overly aggressive easing could reignite price pressures, while a delayed response could stifle growth.

Conclusion

As of May 28, 2025, the euro remains under pressure following German inflation data that reinforced expectations of an ECB rate cut. The currency’s near-term trajectory will hinge on the ECB’s policy decision in June and the subsequent guidance from policymakers. Meanwhile, the dollar’s strength, underpinned by the Fed’s patient approach, is likely to keep EUR/USD rangebound with a downside bias.

FAQs

Q1: Why did the euro weaken after the German inflation data?
The data showed inflation easing more than expected, which increased the likelihood of an ECB interest rate cut. Lower rates make the euro less attractive to investors, leading to currency depreciation.

Q2: What is the current EUR/USD exchange rate?
As of the latest data, EUR/USD is trading near $1.0850, close to its lowest level in two weeks.

Q3: When will the ECB make its next rate decision?
The ECB’s next monetary policy meeting is scheduled for June 6, 2025, where a 25-basis-point rate cut is widely expected.