JPMorgan's European economic research team has indicated that the European Central Bank (ECB) is highly likely to keep its policy rate unchanged at 2% this week and is not expected to adopt a strongly hawkish stance to counter the recent appreciation of the euro against the US dollar. The bank's analyst, Greg Fuzesi, noted in the report that despite geopolitical turbulence at the start of the year and the euro's exchange rate briefly surpassing the 1.20 "warning line" previously mentioned by ECB Vice President de Guindos, current economic data does not challenge the 2% policy rate.
From an inflation perspective, the ECB staff projections from last December show that both headline and core inflation are already very close to target levels over the forecast horizon, and these projections were made on the assumption of unchanged policy rates. Although inflation in the first quarter of 2026 may come in slightly below expectations, an unexpected uptick in GDP growth in the fourth quarter of 2025, a renewed decline in the unemployment rate, and rising consumer inflation expectations all support the ECB's decision to stand pat.
Regarding the euro's exchange rate fluctuations, which are a focus for markets, JPMorgan's analysis suggests that the current movements are not significant enough to trigger serious concern from the ECB. On one hand, the euro's appreciation against the dollar should be viewed in the context of the 1.16 exchange rate baseline from the December projections; on the other hand, the rise in the trade-weighted exchange rate is considerably lower than the EUR/USD increase, and rising energy prices will also provide support for inflation.
The ECB assesses exchange rates by comprehensively considering their level, speed of change, and persistence of trends. Currently, against a backdrop of economic resilience, exchange rate movements do not yet constitute a clear threat. The bank expects the ECB's policy statement to see no major adjustments, continuing to reiterate its data-dependent approach, meeting-by-meeting assessment, and policy stance of making no pre-commitments.
Any commentary related to the exchange rate and potential changes in policy discussions are most likely to be disclosed during the press conference. Furthermore, JPMorgan anticipates that the ECB will not aggressively intervene on the exchange rate and remains satisfied with the current interest rate level, but will signal its readiness to respond to various shocks.
Uncertainties in areas such as geopolitics remain elevated, and the directional impacts of various uncertainties differ; the exchange rate movement itself has not yet significantly altered the overall risk balance.
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