Market Update: ECB on hold “in a good place” but markets see growth optimism as hawkish signal - 24 July 2025

Highlights: The European Central Bank (ECB) kept policy rates on hold (deposit rate at 2.0 per cent) and signalled it is in “a good place” to “remain on hold” and assess the ongoing situation amid a volatile global trade environment. President Lagarde said that growth in the Eurozone has “so far proven resilient overall” despite the elevated uncertainty, slashing derivative markets’ expectations for further easing, and reinforcing our view. Amid the ongoing EU-US trade talks and expectations of weaker eurozone earnings, we hold a neutral view on Europe ex-UK equities and EUR/USD in the absence of strong drivers for further upside.

• After eight interest rate cuts in this cycle, easier financing conditions underpin domestic demand and higher real incomes allow households to spend more, according to the ECB. And with underlying inflation broadly in line and expectations anchored, the ECB is well-positioned to “wait-and-see” until the trade outlook clears
• Risks linger and, as Pr. Lagarde highlighted, are double-sided on inflation and downside-tilted for growth, which should keep policymakers from pre-committing to a rate path and maintain their meeting-by-meeting approach
• The recent euro appreciation has weighed on European firms’ earnings, as the ongoing Q2 earnings season is likely to confirm, and while the ECB warned against a further drag on investments, policymakers remain comfortable with current levels
• Money markets trimmed expectations for an additional ECB rate cut. Equities gave up most of today’s tariff-relief rally, while sovereign bond yields climbed across maturities. EUR rallied against peers, including USD, CHF and GBP
• We have a neutral view on Europe ex-UK equities with a preference for opportunities in the Financials, Industrials and Utilities sectors. Our preferred exposure in the fixed income space lies with IG bonds of 7-10-years duration, while we hold a neutral view on EUR