The European Central Bank is on the verge of cutting interest rates. How will exchange rates like EUR/CNY evolve?

June 5th, the European Central Bank is set to release its interest rate decision, which is the market’s focal point. Amid the current backdrop of declining inflation and slowing economic growth, expectations of a rate cut have become a market consensus. According to the latest data from LSEG, the market has fully priced in a 25 basis point rate cut, with deposit rates expected to decrease from 2.25% to 2%, marking the eighth adjustment by the ECB in the past 12 months.

Data Support: Inflation Touches Target Level

The latest Eurozone CPI data for May shows a harmonized index year-over-year initial reading of 1.9%, hitting an eight-month low and falling below the European Central Bank’s 2% target for the first time. This trend confirms the continued easing of inflationary pressures. Meanwhile, when releasing its quarterly forecast, the ECB is expected to lower its inflation and economic growth projections for this year and next, laying the groundwork for further easing policies.

Outlook: Room for Rate Cuts Within the Year

Analysts generally believe that the ECB still has room to cut rates after this decision. Most expect another rate cut before the end of the year, which would ultimately stabilize deposit rates around 1.75%. This policy path reflects support for economic growth while leaving buffers for potential risks.

Exchange Rate Outlook: Euro Resilience May Exceed Expectations

The key question is: does a rate cut necessarily lead to a weaker euro? U.S. Trust Bank’s latest view provides a negative answer. The institution points out that, given the overall depreciation pressure on the dollar, even if the ECB proceeds with rate cuts, the euro’s downside remains limited. The EUR/USD exchange rate is expected to fluctuate within the 1.10-1.15 dollar range, with market buy-the-dip momentum effectively supporting the exchange rate.

Regarding the EUR/CNY exchange rate, analysts suggest a comprehensive observation of the dollar’s trend and the economic differences between China and Europe. Strategists further note that the market has already fully priced in subsequent rate cuts, and investors are unlikely to sell euros heavily due to rate declines. Conversely, the dollar needs significant economic data improvements to regain momentum. Until U.S. economic data shows notable improvement, the EUR/USD still has upward potential, which indirectly will also influence the euro’s relative performance against other currencies, including the Chinese yuan.

Danske Bank’s analysis team adds that the key to the dollar’s movement lies in the performance of U.S. economic data, not just interest rate levels. As long as U.S. economic data remains weak, the dollar will struggle to gain strong support, and the euro’s strength is expected to persist.

Overall, a rate cut by the ECB in June seems highly likely, but this does not necessarily mean the euro will depreciate. The dollar’s weakness, market full pricing, and buy-the-dip participants will all support the euro. Investors should pay close attention to the EUR/USD exchange rate while also monitoring the EUR/CNY trend.