ECB Expected to Pause Rate Cuts Amid Rising Trade Tensions and Strong Euro

The European Central Bank (ECB) is widely expected to pause its rate-cutting cycle at its upcoming policy meeting, maintaining the main interest rate at 2% after eight consecutive cuts. This shift reflects growing caution among policymakers as new U.S. trade tariffs and currency strength begin to weigh on the eurozone outlook.

The proposed 30% tariff on European Union exports by the U.S.—set to take effect in August—is expected to reduce eurozone GDP growth by up to 0.5 percentage point, according to economists. As a result, the ECB is reassessing its easing path, prioritizing stability and awaiting further data on the fallout from these trade measures.

Inflation within the euro area is gradually moving closer to the ECB’s 2% target, with forecasts suggesting it could dip to 1.4% by early 2026. While that would traditionally support continued monetary easing, the recent strengthening of the euro, which is now approaching $1.20, raises concerns about export competitiveness and further economic headwinds.

Given these dynamics, ECB officials are signaling a more cautious approach. Markets remain divided: some investors expect rate cuts to resume later in 2025, particularly if trade tensions escalate or growth slows further. Others believe the central bank may hold rates steady through the end of Q3, waiting for greater clarity on external risks.

The ECB’s next decision will be closely scrutinized by investors looking for signals on the future direction of monetary policy in Europe, especially as global central banks adopt increasingly divergent paths in response to inflation, trade friction, and currency volatility.

As the eurozone economy navigates a complex environment of external pressure and internal fragility, the ECB’s balancing act between supporting growth and avoiding policy overreach remains a central focus for global markets.