Nomura analysts note EUR/USD’s move above 1.20 and subsequent pullback, highlighting ECB concerns about excessive Euro strength. Surveyed investors see 1.25–1.30 as levels that could prompt an ECB rate cut, but Nomura argues Oil’s rise offsets Euro-driven disinflation and expects EUR/USD to return to 1.20 by year-end.

Exchange rate impact on ECB policy

"EUR/USD breached last week what some ECB members previously flagged as the all-important level of 1.20. Guindos suggested in the summer of last year at Sintra that “beyond [1.20], it would be much more complicated [for the ECB]” (source: Bloomberg), and the FT reported earlier in the week that Governing Council member Kocher suggested further strengthening could force the ECB to act [and cut rates]."

"We launched an investors’ survey (Figure 4) in which a plurality of respondents (34%) judged 1.25 as the level of EUR/USD that could encourage another ECB rate cut, with 1.30 (23%) the second most popular option. 20% of respondents thought the ECB will simply ignore the exchange rate, potentially at any level."

"A stronger euro could add disinflationary pressures, though at what level this may trigger a response from the ECB on account of the effect on inflation is debatable. Moreover, EUR/USD has since retraced and now stands at 1.18, though our FX strategy team has forecast a rise back to 1.20 by year-end."

"However, oil prices rallied at the same time that EUR/USD rose to 1.20. At the end of last week, the price of oil was approximately 5% above the ECB’s assumption in December 2025, while EUR/USD was approximately 3% stronger."

"In both cases, there would have needed to be continued FX appreciation and energy price rise for these shifts to have a persistent impact on long-term inflation (notwithstanding second-round risks). This is one reason central banks often look through the direct impact of such moves."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)