BNY said the ECB’s February decision has limited further euro strength, and the Governing Council is likely to keep its current guidance. It also said there is a high threshold for responding to currency moves.
BNY said a policy response would require much larger downside surprises in German, Spanish and Dutch inflation to shift the price outlook away from current projections. It did not provide figures for those inflation measures.
Shift In Euro Drivers
BNY iFlow data said the largest EUR/USD move last year came from higher euro holdings by cross-border and euro-based asset allocators in the first half of the year. It said cross-border flows reduced a heavy underweight position in the euro.
BNY said total euro holdings have risen, suggesting recent euro moves are being driven mainly by Eurozone or euro-denominated asset allocators. It said this rise is beyond what asset gains alone would imply.
BNY said Eurozone investors have raised hedging on overseas portfolios, mainly in US assets. It added that the ECB may look to the Fed to limit further pricing of rate cuts, while considering its own changes to address weaker dollar preference and non-monetary factors.
The European Central Bank’s decision in early February has effectively put a cap on further Euro strength. We see the Governing Council as being comfortable with its current stance on policy. The bar for them to intervene directly against a strong Euro remains very high.
Implications For Eurusd
This view is supported by recent inflation data, as January’s German CPI came in at 2.1%, still above the ECB’s target. It would take a much larger drop in inflation from core countries to change the bank’s outlook. For now, this suggests limited upside for the EUR/USD pair.
We have seen a notable shift in what is driving the currency market since last year. Looking back at 2025, the Euro’s rally was largely fueled by international investors buying into the currency. Now, the main influence is coming from investors based right here in the Eurozone.
This change indicates that Eurozone investors are increasingly hedging their overseas portfolios, particularly their U.S. assets. By selling dollars to protect their gains, they are creating a steady, underlying demand for the Euro. This local activity is now the marginal driver of the Euro’s performance.
For derivative traders, this dynamic suggests that selling out-of-the-money call options on EUR/USD could be an effective strategy. With 1-month implied volatility hovering at a relatively low 5.5%, the market is not pricing in a major upward breakout. This environment is favorable for strategies that profit from the currency pair remaining in a defined range.
The ECB appears to be relying on the U.S. Federal Reserve to prevent the dollar from weakening significantly. Recent U.S. economic data, such as last week’s strong jobs report which added over 250,000 payrolls, gives the Fed little reason to signal rate cuts. This external factor should help keep the Euro’s strength in check.
