The euro could be poised for further gains in the near term if European Central Bank President Christine Lagarde refrains from pushing back forcefully against market pricing for higher interest rates at this week’s policy meeting, according to Morgan Stanley.
In a note, the bank’s FX strategists said the absence of clear resistance from ECB officials to recent rate-rise speculation has heightened the risk around Thursday’s meeting. Markets have increasingly questioned whether policy settings are restrictive enough, particularly as euro-area inflation proves more resilient and growth holds up better than expected.
Morgan Stanley argued that if Lagarde avoids leaning decisively against expectations for higher rates, the euro could strengthen further, especially if the ECB communication shift coincides with softer U.S. nonfarm payrolls data. A weaker U.S. labour print would reinforce expectations that the Federal Reserve ease further, adding downside pressure to the dollar.
From a technical perspective, the bank sees scope for the euro to break above key resistance levels. A sustained move above $1.1920 would open the path toward $1.20, a level not seen since earlier phases of the post-pandemic recovery. Broader dollar weakness could extend the rally further, even if the ECB ultimately delivers rate cuts later in the cycle.
Looking beyond the near term, Morgan Stanley’s broader framework suggests a more constructive medium-term outlook for the single currency. The bank does not view an “ECB on hold” scenario as its base case and continues to expect 50 basis points of rate cuts, though it argues that euro appreciation can still occur in that environment if U.S. rates, risk premia and global capital flows evolve in the euro’s favour.
In a more bullish scenario, Morgan Stanley said a combination of shifting U.S. rate expectations, declining dollar risk premia and stabilising European growth dynamics could ultimately push the euro toward $1.30 over the longer term. While that outcome would require sustained dollar weakness and favourable global conditions, the strategists see euro downside risks as increasingly limited relative to upside potential.
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The US jobs data, October NFP is due at 1330 GMT / 0830 US Eastern time today, Tuesday, December 16, 2025.
The ECB policy announcement is due on Thursday:
- statement at 1315 GMT/ 0815 US Eastern time
- Lagarde speaks a half hour later
This article was written by Eamonn Sheridan at investinglive.com.