Euro Rally Pauses as ECB Signals Caution on Rate Hikes

Over the past two weeks, the EUR/USD pair has posted notable gains. However, the rally began to stall around 1.1800 on Wednesday (April 15), amid ongoing geopolitical uncertainty and waning investor confidence in the likelihood of further ECB tightening.

The Eurozone has been among the regions most exposed to surging global energy prices. Heavy reliance on imports has made it difficult for the bloc to secure adequate energy supplies, particularly as deliveries from Russia and parts of the Middle East remain disrupted by geopolitical tensions. As a result, energy costs have continued to climb, fueling concerns about inflation and weighing on the region's economic growth outlook.

This situation has sparked speculation that the ECB will raise interest rates one to three times before the end of the year, especially after inflation projections for 2026 and 2027 were revised upward at the bank's prior meeting. However, recent comments from ECB President Christine Lagarde tempered those expectations.

Lagarde stated that while the Eurozone economy has moved away from the ECB's baseline scenario related to the Iran conflict, it has not strengthened sufficiently to justify additional rate hikes. She emphasized that current conditions lie somewhere between the baseline scenario and a more adverse outcome.

These comments immediately affected market sentiment. Gains in the euro across major currency pairs became more limited. EUR/USD has failed to break above the 1.1800 threshold in recent sessions, EUR/JPY has remained capped near 187.50 since the start of the week, while EUR/GBP has stayed below the 0.8700 mark.

Analysts at Natixis noted that declining oil prices, combined with Lagarde's cautious tone, have reduced expectations for aggressive ECB tightening. Market participants now anticipate just over two rate increases over the course of the year.

Some observers believe that if tensions between the US and Iran ease, market focus is likely to return to domestic factors. Nevertheless, in both escalation and de-escalation scenarios of the conflict, the euro is seen as having stronger upside potential against the British pound than against the US dollar.

Sterling, meanwhile, continues to face multiple headwinds, including rising unemployment, elevated energy costs, mounting government debt, and shifting domestic political dynamics. The United Kingdom is also scheduled to hold local elections in May, which opposition figures view as a "referendum" on Prime Minister Keir Starmer's leadership.

Analyst Sarah Ying added that the pound remains highly sensitive to geopolitical tensions. She noted that long positions in the EUR/GBP pair still appear attractive, with the potential for a near-term retest of the 0.8742 level.