Euro tumbles after a relief rally as ECB officials warn economic slowdown

• The EUR declines significantly against its currency peers as higher Euro interest rates prompt economic woes.
• The common currency recovered strongly on Tuesday after France pledged to increase spending cuts.
• ECB’s Lane said that a rise in long-term rates will slow growth and reduce pass-through by more than projected.

The Euro (EUR) underperforms its major currency peers on Wednesday, trading almost 0.55% lower at around 177.00 against the Japanese Yen (JPY) in the European trade.

The major currency faces intense selling pressure after a relief rally on Tuesday, as European Central Bank (ECB) officials warn of economic slowdown due to higher energy prices, tight monetary conditions and surging bond yields.

Lane signals cautious middle path as long-term yields tighten Euro conditions

ECB Chief Economist Philip Lane scores 4.6/10 on FXS Speechtracker, below the historic 5.3/10 baseline, pointing to a slightly more dovish-than-usual tone despite acknowledging growth headwinds from higher long-term rates. The emphasis that underlying inflation has not shifted higher in the medium term, and that demand destruction from elevated energy costs can limit the required adjustment in ECB rates, reinforces a preference for a measured policy stance rather than aggressive tightening.

The “middle path” framing suggests a balanced approach, but the recognition that a second wave of the energy supply shock brings upside inflation risks and downside growth risks keeps a mild hawkish bias alive at the margin. For the Euro, this mix of softer inflation pass-through and constrained growth, offset by lingering energy-driven inflation risks, argues for reduced expectations of near-term rate hikes while limiting scope for pronounced Euro downside as markets price a slower, data-dependent policy trajectory.

ECB official and Finnish Central Bank Governor Olli Rehn also highlighted on Tuesday economic worries in the wake of higher long-term interest rates. “High long-term rates contributing to a slowdown in growth and reduces pass-through of energy prices to other prices and to wages,” Rehn said.

On Tuesday, the Euro saw a relief rally after hitting a fresh Year-Till-Date (YTD) low at around 176.22 against the Japanese currency, as French Presidential candidate Marine Le Pen proposed increasing spending cuts to €140 billion, from €125 billion. This led to a sharp recovery in demand for French bonds and diminished fears of widening spreads in yields with other European nations.