The ECB's June decision is approaching. How will the euro exchange rate fluctuate? Is there still room for interest rate cuts this year?

June 5th will mark a key policy announcement from the European Central Bank. Against the backdrop of increasing global economic uncertainty, this meeting will profoundly influence the subsequent trends of the EUR/USD and EUR/CNY exchange rates.

The market has fully priced in rate cut expectations

According to LSEG data, traders generally expect the ECB to cut deposit rates by 25 basis points at this meeting, targeting 2%. This will be the eighth adjustment by the bank in the past 12 months. More notably, the market has already priced in additional rate cuts later this year, with deposit rates expected to further decline to around 1.75% by the end of the year.

Inflation data supports this expectation. The Eurozone’s May harmonized CPI preliminary year-on-year figure was 1.9%, a new 8-month low, and the first time it has fallen below the ECB’s 2% policy target. Analysts believe this will prompt the ECB to revise down its inflation and GDP growth forecasts simultaneously when releasing its quarterly economic projections.

The euro may remain resilient, while the dollar needs an economic recovery to support it

Contrary to conventional wisdom, a simple rate cut may not weaken the euro. UBC Bank strategists point out that in the context of a generally weakening dollar, even if the ECB adopts an easing policy, the euro still has defensive capacity.

Looking at specific exchange rates, the EUR/USD is expected to fluctuate within the range of 1.10-1.15 USD. Investor “buy-the-dip” behavior has become a natural stop-loss line for the euro’s decline. Meanwhile, Danske Bank analysts believe that the dollar’s rally requires a significant improvement in US economic data to sustain. Before this moment arrives, the EUR/USD is likely to continue facing downward pressure, which will also influence the relative strength of the EUR/CNY exchange rate.

Policy direction is set, focus now on inflation and US developments

Although the market is well prepared for a rate cut on June 5th, the real turning point will depend on subsequent inflation trends and US economic performance. Ongoing US trade policies under Trump continue to pressure the European economy, which has somewhat accelerated the ECB’s rate cut cycle.

From a longer-term perspective, the ECB still has room for about one more rate cut this year. The key variables influencing the EUR/USD and EUR/CNY exchange rate trends will gradually shift from “policy divergence” to “growth outlook” and “trade environment.”