ECB Decision

The Eurozone Macroeconomic Outlook: Sluggish Growth, Fragile Inflation
The Eurozone continues to follow an uncertain economic trajectory. GDP growth in the euro area for Q2 2025 was around 0.2% quarter-on-quarter, highlighting stagnation in private consumption and a slowdown in industrial production, particularly in Germany and France. Core inflation remains below the 2% target, hovering around 1.6%, due to weak domestic demand and wages which, although slightly rising, are not generating significant inflationary pressures.

Geopolitics and Trade Wars: External Uncertainties

Internal weaknesses are compounded by international tensions weighing on European exports and investor confidence:

• Tariffs and counter-tariffs between the United States and China have regained momentum, indirectly involving European suppliers and partners, particularly in the tech and automotive sectors. All eyes are now on what will happen on August 1 amid ongoing US-EU negotiations.

• The armed conflict in Ukraine remains an open wound, with new reciprocal sanctions between the EU and Russia impacting energy and raw materials.

• Tensions in the Red Sea and Persian Gulf, with intermittent disruptions to maritime trade routes, continue to raise logistics costs and slow down supply chains.

Fed vs ECB: Policy Comparison and Currency Trends
The Federal Reserve held rates steady at its June meeting, keeping the federal funds rate between 4.25% and 4.50%, and indicated the possibility of two cuts (totaling about 50 basis points) by the end of 2025, although none are expected in the first half. Markets anticipate the first cut in the fall, around September/October.

On the currency front, the euro has significantly strengthened over the first seven months of 2025, appreciating by over 12% against the dollar (from approximately 1.03 USD to over 1.18 USD). In recent days, the euro has remained stable at elevated levels, fluctuating around 1.16–1.17 USD.

This divergence reflects two main factors: firstly, a still-restrictive US monetary policy delaying rate cuts; secondly, increased confidence in the European economy supporting the common currency. Although the Fed didn’t cut rates in H1, markets already anticipate two cuts in the fall, while the ECB remains more cautious, with room to maneuver but no firm decisions yet announced. We now await the Fed’s decision expected at the end of July 2025.

In Summary

Investors must remain agile, ready to rebalance portfolios based on bond flow direction and macro expectations. The weeks following July 24 will be crucial for market sentiment and the Eurozone’s trajectory in the second half of 2025.

The president Christine Lagarde is navigating a delicate balance between supporting recovery and maintaining long-term inflation expectations. The cautious stance taken on July 24 confirms the ECB's “wait and see” approach, pending more clarity on growth and wage dynamics.

The impact on the Bond Market:

• Yield stabilization, with potential modest rise in the mid-to-long part of the curve

• Reduced appeal for core bonds; spreads may widen for corporate and peripheral debt in the absence of new liquidity

Opportunities for Investors:

• • Rotation toward real assets (equities, REITs, commodities) or absolute return strategies

  • Focus on active credit selection and duration reduction

  • Increased attention to FX hedging instruments for non-euro investors