Euro Drops After Lagarde Downplays Inflation Risks from U.S. Tariffs

The euro weakened on Thursday after European Central Bank (ECB) President Christine Lagarde warned of potential slower growth in the eurozone while downplaying the risk of sustained inflation increases, should the European Union retaliate against President Trump’s proposed tariffs.

Key Takeaways:

• Lagarde’s Warning on Economic Growth:
  • She outlined a scenario where eurozone GDP could decline by 0.5 percentage points in the first year if trade tensions escalate.
  • While inflation could rise by the same margin, Lagarde stressed that this increase would likely be temporary.
• ECB’s Stance on Interest Rates:
  • Despite inflation concerns, Lagarde suggested the ECB would not raise interest rates in response.
  • The central bank remains focused on supporting growth rather than tightening monetary policy prematurely.
• Market Reaction:
  • The euro weakened, falling to $1.0850 from $1.0878 before Lagarde’s speech.
  • Investors reacted to uncertainty over eurozone economic resilience amid potential U.S.-EU trade conflicts.

With trade tensions looming, the ECB appears set to maintain a dovish stance, prioritizing growth stability over short-term inflation fluctuations.