This song came to mind yesterday as I listened to ECB President Christine Lagarde during her press conference. The general impression was that the president and her colleagues on the ECB Governing Council are currently very comfortable with the current key interest rate level. This was also reflected in the fx market, which is why the euro ultimately gained ground against the US Dollar (USD), Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

The expected EUR/USD rise is primarily driven by a weak USD

"In response to the interest rate decision, the single currency initially weakened, as some may have been surprised by the slight downward revision of the inflation forecast for 2027 from 2.0% to 1.9%. However, Lagarde played this down later in the press conference. Thus, the upward revision of growth forecasts carried more weight, making further interest rate cuts by the ECB less likely. However, this was not enough to push EUR/USD up by more than half a cent yesterday. As my colleague Michael explained here beforehand, the market was no longer expecting further interest rate cuts in the coming months, but only in the coming year."

"What could justify a resumption of interest rate cuts? One thing in particular comes to mind: a stronger euro. At least some Council members had signaled this when EUR/USD rose to an interim high of just over 1.18 at the beginning of July. At the time, Vice President de Guindos even explicitly stated that a rate above 1.20 would be 'problematic'."

"Now, we have raised our year-end forecast for EUR/USD from 1.20 to 1.22. The reason for this is our assumption that US interest rates will be cut more sharply now that there are increasing signs of a more pronounced slowdown in the US economy. Could this be a problem for the ECB? Not necessarily. Since de Guindos' comments in July, growth prospects have improved, as the ECB demonstrated yesterday. In this respect, the tolerance limit for further euro strength is likely to be higher. More importantly, however, the EUR/USD rise we expect is primarily driven by a weak US dollar."