The ECB's rate cut expectation has been priced in. How will the EUR/CNY exchange rate trend adjust?

As the European Central Bank’s interest rate decision on June 5 approaches, market discussions about its policy stance are heating up. According to the latest data from LSEG, investors have fully priced in a 25 basis point rate cut and remain attentive to the possibility of another cut within the year. Behind these series of policy adjustments reflects the new reality of gradually declining inflation in the Eurozone.

Inflation Data Supports Rate Cut Expectations, Market Pricing Is Fully Reflective

The latest statistics show that the Eurozone’s May harmonized CPI preliminary reading was 1.9% year-on-year, hitting an eight-month low and first falling below the ECB’s 2% target. This data lays the foundation for further easing by the central bank. Industry analysts point out that when the ECB releases its quarterly forecasts, it is expected to simultaneously lower inflation and growth projections, preparing for subsequent policy adjustments.

Over the past year, the ECB has completed seven rate cuts, with noticeable cumulative effects. The mainstream market expectation indicates that this meeting will again cut the deposit rate by 25 basis points to 2%, with the possibility of another rate cut before the end of the year, potentially stabilizing the deposit rate around 1.75%. Futures markets have already fully priced in these expectations, and there is little suspense remaining about a rate cut.

Weakening US Dollar Provides Support, EUR/CNY Exchange Rate Has Upside Potential

Interestingly, while rate cuts usually suggest a currency facing depreciation pressure, the euro has shown relatively strong resilience in the current environment. Yúxìn Bank’s strategy team points out that since the US dollar is generally in a weak cycle, even if the ECB continues to cut rates, the euro is unlikely to experience significant depreciation. This asymmetric reaction indicates that the fundamental difficulties facing the dollar are more concerning than the ECB’s policy shift.

In the EUR/USD currency pair, analysts generally expect the exchange rate to fluctuate within the 1.10-1.15 USD range. Investors’ buy-the-dip behavior during exchange rate declines effectively forms a defensive line, limiting the euro’s downside. This means that the outlook for EUR/CNY also benefits from the stability of the euro-dollar spread, with potential upside worth期待。

Dollar Needs Economic Data Improvement to Reversal, Euro Continues to Strengthen

Danske Bank analysts believe that for the dollar to regain market support, there must be a clear improvement in US economic data. Until such a key improvement occurs, the euro’s upward momentum against the dollar is expected to continue. This also suggests that the main short-term driving force behind EUR/CNY will be more from policy divergence between Europe and the US and dollar weakness, rather than the ECB’s simple rate cuts.

Overall, despite the ECB’s commitment to rate cuts, the actual performance of the euro may exceed expectations, and EUR/CNY is also likely to remain relatively strong. Investors need to recognize that the complexity of currency market pricing often exceeds the influence of a single policy factor.