Christine Lagarde told the European Parliament’s ECON committee that Eurozone inflation should return to, and then stabilise around, the ECB’s 2% target over the medium term. She said the ECB’s steps to bring inflation down have worked. She said food inflation should keep falling, then settle a little above 2% from late 2026. She also said the economy should be supported by higher labour income, a strong labour market, and more spending on defence, infrastructure, and digital technologies.

Exchange Rate Policy And Inflation Outlook

Lagarde said the ECB watches foreign exchange markets but does not target the exchange rate. She said the ECB is not seeing job losses linked to AI, and that policy will stay data dependent and flexible. The Euro fell slightly, with EUR/USD trading a bit lower near 1.1800. The ECB’s main goal is price stability around 2%. It mainly uses interest rates to achieve this, with eight policy meetings each year. Quantitative easing (QE) means creating Euros to buy assets such as government or corporate bonds. The ECB used QE in 2009–11, in 2015, and during the COVID pandemic. Quantitative tightening (QT) is the reverse. It happens when the ECB stops making new bond purchases and stops reinvesting maturing bonds. QT often supports the Euro. These comments confirm that the rate-hiking cycle that ended in 2023, followed by a long pause through 2025, is clearly over. The ECB is signalling that policy has done its job and is now looking ahead to normalisation. This supports the market view that rate cuts will come eventually, but not soon.

Market Implications For Rates And FX

Recent Eurostat data backs this up. Headline inflation for January 2026 was 2.1%, close to the ECB’s target. Unemployment also stayed at a historically low 6.3% in the final quarter of 2025. With the labour market still strong, the ECB has little reason to cut rates quickly. The “agile” message should be read as a willingness to wait for several months of steady data. For derivatives traders, this points to a focus on volatility around key data releases, rather than making a big directional call on rates. Because the ECB is “data dependent,” implied volatility in options on Euribor futures may rise ahead of inflation and wage-growth reports. Any clear sign of economic weakening could bring forward expectations for rate cuts. The immediate dip in EUR/USD to around 1.1800 suggests the market did not hear a hawkish surprise, which may limit the Euro in the near term. With Q4 2025 GDP growth at only 0.2%, the economy does not support a much stronger currency. Range-based option strategies, such as iron condors, may fit the current setup over the next few weeks. Wage growth is now the key indicator for the timing of the first rate cut. The ECB has moved into a “management” phase, which is a big shift from the earlier inflation-fighting stance. That makes pricing for cuts in late 2026 look more realistic than trades that expect action within the next quarter. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now