BNY said the ECB’s February decision has reduced the chance of further euro strength. It expects the Governing Council to keep its current guidance. It also said the ECB has a very high bar for reacting to currency moves.
BNY added that a policy response would likely require a much larger downside surprise in German, Spanish, and Dutch inflation to move the outlook away from current projections. It did not give specific figures for those inflation measures.
Shift In Euro Drivers
BNY iFlow data said the biggest EUR/USD move last year was driven by cross-border and euro-based asset allocators increasing their euro holdings in the first half of the year. It said these cross-border flows reduced a large underweight position in the euro.
BNY said total euro holdings have continued to rise. This suggests recent euro moves are now being driven mainly by Eurozone or euro-denominated asset allocators. It added that the increase is larger than what you would expect from asset price gains alone.
BNY said Eurozone investors have increased hedging on overseas portfolios, mainly U.S. assets. It added that the ECB may rely on the Fed to limit further pricing of rate cuts, while reviewing its own approach to address weaker dollar preference and other non-monetary factors.
The ECB’s early-February decision has effectively capped further euro strength. We expect the Governing Council to stay comfortable with its current policy stance. The hurdle for direct action against a strong euro remains very high.
Implications For Eurusd
This view is supported by recent inflation data. Germany’s January CPI was 2.1%, still above the ECB’s target. It would take a much sharper drop in inflation in core countries to change the ECB’s outlook. For now, this points to limited upside for EUR/USD.
The drivers of the currency market have also changed since last year. In 2025, the euro’s rally was mostly driven by international investors buying euros. Now, the main support appears to be coming from Eurozone-based investors.
This shift suggests Eurozone investors are hedging more of their overseas exposure, especially U.S. assets. When they hedge, they often sell dollars. That creates steady demand for euros and has become a key day-to-day driver of the currency.
For derivatives traders, this setup may support selling out-of-the-money EUR/USD call options. With 1-month implied volatility around 5.5%, the market is not pricing a major upside breakout. This can favor strategies that benefit from the pair staying in a range.
The ECB also appears to be leaning on the U.S. Federal Reserve to prevent a sharp dollar decline. Recent U.S. data supports that view. Last week’s strong jobs report, with more than 250,000 payrolls added, gives the Fed little reason to signal near-term rate cuts. This outside support may help limit further euro gains.
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