The euro’s sharp rise has become a central issue ahead of the European Central Bank’s first policy meeting of 2026. Officials see currency strength as a potential drag on prices. Eurozone inflation already slipped just below 2% in December. Economists now expect January inflation to slow to 1.7%, raising fresh questions about downside risks.
The euro’s rally has pushed EUR/USD briefly through $1.20, its strongest level since 2021. The move followed a dramatic slide in the US dollar after comments from Donald Trump that he was not concerned about the currency.
Policy makers meet in Frankfurt with the deposit rate expected to stay at 2.00% on Thursday, February 5. Markets also price no change after the ECB has held rates steady since June.
Still, officials have signaled they will watch the exchange rate closely. François Villeroy de Galhau said the euro is one factor guiding policy, while Martin Kocher said officials will monitor further gains.
Inflation momentum has softened, and economists expect the next print to come in at 1.7%. Eurostat is due to publish the data on Wednesday.
The ECB has argued that price growth should return to its goal over the medium term without additional action. However, a further euro appreciation could revive debate about additional cuts if it weighs on imported inflation.
Recent market moves have reignited that discussion, but some analysts see limited urgency. They noted the broad euro nominal effective exchange rate (NEER) has risen only 0.2% since the December meeting and about 1.0% since the cut-off date for the latest staff projections.
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President Christine Lagarde is expected to face questions about the euro's strength. Analysts expect her to respond neutrally and avoid signaling any target level for the exchange rate.
An ECB paper cited in the briefing adds context for the debate. It found that a 10% appreciation in the nominal effective exchange rate reduces euro-area core goods inflation by 0.25 percentage points after one year and cuts headline Harmonised Index of Consumer Prices (HICP) inflation by 0.06 percentage points.
Officials also weigh domestic conditions that remain resilient in the near term. The euro-zone economy grew 0.3% quarter-on-quarter in the fourth quarter of 2025, beating the 0.2% consensus, while the unemployment rate fell to 6.2%.
Growth strength appeared broad-based, with stronger-than-expected outcomes in Germany, Spain, and Italy, while France met expectations. Analysts also pointed to private consumption as a driver, supporting the ECB’s “good place” assessment.
Inflation dynamics still look mixed across components. Energy base effects are expected to pull headline inflation down to 1.7% year-on-year in 2026’s first quarter, while services inflation remains sticky and inflation expectations have held steady.
The ECB also releases quarterly surveys on bank lending and professional forecasters’ views in the coming week. However, investors expect limited policy guidance until fresh staff projections arrive in March.
For now, the meeting is likely to center on how the euro strength, softer inflation, and steady activity interact. Markets may stay calm if officials keep their stance unchanged and reserve any recalibration for when updated projections arrive.