Euro Sinks to One-Year Low as Falling Oil Prices Ease Pressure on the ECB

Frankfurt, June 25 (EBM Newsdesk Analysis) — By Anthony Gill

The euro has fallen to its weakest level in a year against the dollar, as collapsing oil prices ease the inflationary pressure that forced the ECB into its first rate hike since 2023, leaving the central bank with far less reason to tighten further just weeks after signalling it might. The currency slid to around $1.135, as a dramatic reversal in oil prices reshaped the inflation calculus facing policymakers in Frankfurt. 

A Hike That Didn’t Stick

The currency’s decline is particularly striking given it comes just two weeks after the ECB delivered its first rate increase since 2023, lifting its deposit rate by 25 basis points to 2.25% in direct response to energy-driven inflation that hit 3.2% in May. Normally, a rate hike supports a currency by attracting yield-seeking capital. Instead, the euro fell. Markets, it appears, were less impressed by the hike itself than by what it implied: a central bank tightening into an economy that was already losing momentum, a combination that rarely rewards a currency.

Oil’s Collapse Changes the Calculus Entirely

“The euro zone economy has slowed in response to the energy price shock,” said Lee Hardman, senior currency economist at MUFG. “The combination of weaker growth in the euro zone and lower energy prices is helping to ease pressure on the ECB to hike rates further.” That reversal has been rapid: Tuesday’s purchasing managers’ indices showed a contraction in eurozone activity, and ECB President Christine Lagarde said this week that recent data did not demand “a more forceful policy response at this stage” — language that all but closes the door on further hikes for now, a marked shift from the recession warnings some Governing Council members had been sounding just weeks earlier.

The Atlantic Policy Gap Widens

While the ECB pulls back, the Federal Reserve is moving the other way. Traders have added to bullish dollar bets after a hawkish turn from the Fed last week raised expectations of further US rate increases, with inflation there running above 4% against a resilient economy. JPMorgan cut its euro target from $1.13 to $1.10, citing “stabilising growth, sticky inflation and shades of US exceptionalism.” The probability of a second ECB hike this year has fallen sharply, from around 50% to roughly 20%, while the euro has also slipped against sterling, nearing its lowest level since last August.

A Narrow Path Back to Target

Capital Economics analysts believe the ECB may end up “one and done” on this hiking cycle, forecasting eurozone inflation falling from above 3% in May back to the central bank’s 2% target by the end of 2027. “We think headline inflation is already close to its peak, as energy inflation should decline while increases in food and core inflation should be small,” they wrote, adding that second-round effects on wage growth should be “trivial” — a notably more relaxed read than the inflation anxiety that gripped the eurozone’s fragile growth outlook just months ago.

The EBM Take

The euro’s fall is the clearest signal yet that markets have stopped treating the ECB’s June hike as the start of a tightening cycle and started treating it as a one-off response to a now-fading energy shock. That’s a reasonable read, but it leaves the eurozone in an uncomfortable position regardless: growth was already soft before the energy spike, and a currency this weak against the dollar makes imported energy and goods more expensive even as oil itself gets cheaper, partially offsetting the relief the Hormuz deal was supposed to deliver. The bigger risk sits with geopolitics rather than economics — if tensions around the Strait reignite and oil spikes again, the ECB could find itself dragged back into hiking mode at precisely the moment its own data suggests the opposite is warranted, with the euro likely whipsawing in response either way.

Related reads:

• ECB Hikes Rates to 2.25% as Iran War Drives European Stagflation
• Oil Returns to Prewar Levels as Gulf Flows Surge
• ECB’s Stournaras Warns Eurozone Recession Risk Is ‘Real’