Throughout the week, despite clear expectations of further rate cuts, the euro has demonstrated a sharp rally against the U.S. dollar.

It is almost certain that the European Central Bank (ECB) will cut interest rates today for the sixth time since June last year. However, uncertainty about the economic outlook has sparked debate over the future course of borrowing costs.

Economists are almost unanimously forecasting a 25-basis-point cut in the deposit rate to 2.5%. However, opinions diverge beyond that—some analysts do not expect further rate reductions, while others foresee rates dropping to 1% by early 2026.

These stark differences reflect growing divisions among ECB officials. While there was broad consensus on monetary easing, opinions now vary on whether inflation poses a renewed risk and how much support the struggling Eurozone economy still requires.

Adding to the complexity, Germany has recently unfrozen €500 billion to stimulate economic growth, creating additional challenges for the ECB in shaping its monetary policy path.

Further uncertainty arises from the U.S. decision to halt military aid to Ukraine and Europe, which has triggered an urgent push for rearmament that could lead to hundreds of billions of euros in defense spending across the region in the coming years. European leaders are set to discuss this issue at a summit in Brussels today.

Market Pricing and ECB's Internal Divisions

Traders currently price in 62 basis points of easing, including today's expected 25-basis-point cut, down from 65 basis points on Wednesday and 85 basis points last week.

The rate cut decision itself may seem straightforward, but discussions within the Governing Council are expected to be intense. This meeting could mark the last clear-cut decision on rates, as future meetings may become more complex due to growing internal disagreements.

While some ECB policymakers, including Executive Board member Isabel Schnabel, urge discussions on pausing rate cuts, no official has openly opposed today's expected decision.

The ECB's divisions stem from different views on the current impact of monetary policy. Schnabel is no longer certain that rates remain restrictive, while Greek central banker Yannis Stournaras insists the ECB is still in tight monetary territory. Officials generally agree that rates should move toward a neutral level, where they neither stimulate nor restrain economic activity.

However, defining this neutral level remains contentious. Some fear that cutting rates too aggressively could trigger a new wave of inflation, while others warn of excessive tightening that could lead to a recession. The ECB faces growing pressure to balance inflation control with economic support. Uncertainty over geopolitical risks and the energy crisis adds further complexity.

Few ECB officials have advocated for more aggressive rate cuts to boost demand. While a recent ECB staff study estimated the neutral rate at 1.75%–2.25%, hawkish policymakers argue that it could be even higher.

Market Impact: Euro's Reaction Depends on Lagarde's Statements

Today's rate cut has already been priced into the markets, meaning that the euro's reaction will depend on ECB President Christine Lagarde's forward guidance.

If Lagarde signals further easing, the euro may face a downward correction. However, if her stance appears more cautious or hawkish, suggesting a pause in rate cuts, the euro could extend its bullish trend.

Technical Outlook

EUR/USD

For buyers to maintain control, EUR/USD must break above 1.0820. A successful move could open the door for a test of 1.0855, followed by 1.0885, though a further push may require stronger support from institutional players. The ultimate upward target would be 1.0920.

On the other hand, 1.0780 is the key support level. If buyers fail to defend it, a drop toward 1.0740 or even 1.0700 may follow.

GBP/USD

For the British pound, the key resistance is 1.2920. A breakout could target 1.2946, though moving above this level may prove challenging. The final upward target is 1.2970.

If GBP/USD falls, bears will aim to regain control at 1.2860. A breakdown of this level would deal a major blow to bulls, sending the pair toward 1.2810, with further downward potential toward 1.2765.