The European Central Bank convenes at a moment when market participants are still digesting a recent burst of uncertainty tied to U.S. trade rhetoric and its knock-on effects for the single currency. Policymakers have relieved the immediate risk after the threat of fresh U.S. tariffs waned, but the episode highlighted how quickly external shocks can force the euro higher and complicate the ECB’s outlook.
Most analysts expect President Christine Lagarde to again keep the policy rate unchanged at 2% - a fifth successive meeting with no change - while emphasising a meeting-by-meeting, data-dependent approach rather than committing to any predetermined path for rates. That stance reflects a preference for flexibility in the face of geopolitical volatility and fast-moving market reactions.
Five questions markets will be watching
1 - What will the ECB choose to do?
The consensus view is that the ECB will hold rates steady at 2% when it meets. With U.S. tariff threats having eased, economists expect Lagarde to stick to a cautious, data-focused policy line without offering explicit guidance on future moves. The broader rationale is that the central bank wants to preserve optionality amid ongoing uncertainty and geopolitical shocks - considerations highlighted by UBS chief European economist Reinhard Cluse, who noted that certain procedural elements are important because the global environment remains unsettled - they matter because the world is subject to uncertainty and geopolitical shocks.
2 - What does the recent U.S. trade tension episode mean for markets?
In the short term it has lifted the euro. The single currency briefly climbed above $1.20 last week - its highest level since 2021 - before easing somewhat. Over the past fortnight it has risen more than 2%. Christian Schulz, chief economist at Allianz Global Investors, summed up the move plainly: the Greenland episode has pushed the euro higher. The ECB will take those developments into account as it reviews risks to the economic projections it will update in March.
Policymakers have voiced concern that further euro appreciation could depress inflation, which is already projected to be below the 2% target this year and next if the currency continues to strengthen. Had the threatened tariffs been implemented, the effect would have been a mixture of higher inflation in the near term and slower growth - a different mix of pressures on policy. Beyond immediate tariff decisions, Lagarde has emphasised that unpredictability in U.S. trade policy could weigh on growth prospects over a longer horizon.
3 - Will the ECB act to counter a rising euro?
Economists generally judge that the central bank is unlikely to respond directly to the recent move yet. Market pricing briefly increased the likelihood of a rate cut this year amid concerns about a stronger currency, but as the euro eased those bets diminished. Current market-implied odds point to roughly a 15% chance of an ECB rate cut by the summer.
Analysts stress that the ECB is more sensitive to the speed and magnitude of exchange-rate shifts than to a specific nominal threshold. Crossing $1.20 is not viewed as decisive by itself; the trade-weighted euro the bank monitors has risen by significantly less, reflecting that much of the move was driven by a weaker dollar rather than a broad-based euro rally. Ross Hutchison of Zurich Insurance Group noted that a quick, sustained advance beyond $1.25 would be the sort of development likely to force a significant downward revision to the bank’s inflation outlook.
Officials will also be watching commodity-price developments. A surge in oil and in European natural gas prices since the start of the year could lessen some downward pressure on inflation, an effect the ECB will factor into its assessment.
4 - How resilient is the euro zone economy?
Recent data show greater resilience than many had expected. Growth accelerated in the fourth quarter and the euro zone expanded by 1.5% over the full year - the fastest pace since 2022 - underscoring that domestic demand has held up despite external trade tensions. Economists surveyed by market participants continue to expect overall growth of about 1.2% this year.
One critical variable for the outlook is the pace at which Germany implements planned fiscal stimulus. BNP Paribas’ head of developed market economics Paul Hollingsworth argued that effective delivery of that fiscal boost could help offset some of the drag from elevated uncertainty. However, German spending increased more slowly than anticipated last year, leading some economists to question how rapidly Berlin can accelerate outlays this year. If fiscal deployment is delayed, growth may come in a little weaker than current consensus forecasts.
5 - What do concerns about Fed independence mean for the ECB?
Worries about political pressure on the U.S. central bank translate into risks for global markets and for the euro zone. A Federal Reserve that appears less independent and that sets policy looser than expected would tend to push the dollar lower and lift U.S. inflation, according to economists. That combination would likely strengthen the euro - a development that would weigh on euro zone inflation - while rising U.S. Treasury yields could spill over into euro-area borrowing costs and pose financial stability concerns.
Such risks returned to the fore following threats by the U.S. administration in January that targeted the Fed chair with a potential criminal indictment. The nomination of Kevin Warsh, a figure more associated with hawkish leanings, as the prospective next Fed chair has helped the dollar recover some of its earlier losses.
In addition, central bankers have signalled concern about the principle of central bank independence. Earlier in January the ECB joined other major central banks in a rare joint statement underlining support for the Fed chair and stressing that central bank independence is essential to maintaining price and financial stability.
For now, the ECB’s public stance is that it will not be debating any change to its policy rate at this meeting. But policymakers acknowledge that developments in exchange rates, commodity prices, fiscal issuance and external political pressures could complicate that outlook and force reassessments going forward - a point emphasised by the ECB’s chief economist Philip Lane.
Context and what markets should monitor next
Investors and analysts will be focused on the language Lagarde uses around data dependency, exchange-rate concerns, and the timeline for the next set of economic projections. Close attention will also be paid to commentary about commodity-price trajectories, German fiscal implementation, and any references to international spillovers from U.S. policy shifts that could affect borrowing costs and inflation in the euro area.
The meeting is unlikely to deliver decisive policy changes, but officials will be positioning for a period in which external shocks and currency moves remain a salient risk for the inflation outlook.