Euro slides to lowest since August as Lagarde signals ECB restraint

Euro Slides to Lowest Level Since August After Lagarde Signals Measured ECB Response

The euro dropped to around $1.141 on Tuesday, its weakest point since August 2025, after European Central Bank President Christine Lagarde told EU lawmakers that the current inflation shock does not yet warrant an aggressive policy response — remarks that widened the perceived gap between the ECB’s cautious stance and the Federal Reserve’s higher-for-longer posture under new Chair Kevin Warsh.

Lagarde’s Dovish Turn

Speaking before the European Parliament’s Committee on Economic and Monetary Affairs on Monday, Lagarde said the ECB’s June 11 rate hike of 25 basis points was “robust across the scenarios prepared by staff,” but stressed that the central bank sees no reason to escalate further for now.econostream-media

“We have yet to observe any signs of inflation expectations becoming unanchored or secondary effects that would justify a stronger policy response at this point,” Lagarde said. She characterized the eurozone as navigating the middle of three internal scenarios — a temporary overshoot requiring only moderate adjustment — and noted the current episode appears less severe than the 2021-2022 inflation surge that forced rapid rate increases.reuters

According to Bloomberg, Lagarde told lawmakers that inflation is expected to fall back to 2% from above 3% “with appropriate monetary-policy action,” suggesting the ECB’s deposit rate of 2.25% need not rise far above the estimated neutral range of 1.75% to 2.50%.bloomberg

Weak PMI Data Compounds Pressure

The EUR/USD decline deepened Tuesday after S&P Global’s flash purchasing managers’ index showed eurozone private sector activity contracted for a third consecutive month in June. The composite PMI improved slightly to 49.5 from 48.5 in May but remained below the 50 threshold separating growth from contraction. The services sector — typically the eurozone’s engine — stayed in contractionary territory at 48.9.infobae

Germany’s manufacturing PMI slipped to around 50, signaling near-stagnation amid war-related cost pressures and faltering demand. France’s manufacturing sector returned to growth at 50.7 in June after contracting in May, though broader activity remained fragile.tradingeconomics

Widening Atlantic Policy Gap

The dollar’s strength reflects a growing transatlantic rate divergence. The Federal Reserve under Warsh held its benchmark rate at 3.50%-3.75% on June 17, with median projections pointing to one additional hike this year. Warsh, in his first press conference as chair, pledged to “deliver price stability” and acknowledged “rigorous debate” among policymakers.youtube

With ECB rates 125 basis points below the Fed’s and Lagarde signaling restraint, traders have pared expectations for further eurozone tightening to one or two modest increases by year-end.reuters