ECB Insight: Euro Strength No Near-Term Trigger for the ECB

29 January 2026

By David Barwick – FRANKFURT (Econostream) – A rapid euro climb toward the psychologically loaded $1.20 area has reopened a recurring question: when does an exchange rate move become a monetary policy problem?

Three Governing Council members addressed that question on Wednesday. Their remarks point to a familiar ECB posture — watch the euro closely, deny any exchange-rate target, and resist the idea—including the supposed $1.20 threshold flagged by Vice President Luis de Guindos last year—that a single point can shortcut the Governing Council’s reaction function.

Worth noticing is less the fact that the operative criterion remains inflation projections than how high the bar still looks in practice even with US President Donald Trump’s recent remarks being read by markets as welcoming a weaker dollar.

Austrian National Bank Governor Martin Kocher, speaking to the Financial Times, offered a conditional he may not even have envisaged as worth a headline: “If the euro appreciates further and further, at some stage this might create of course a certain necessity to react in terms of monetary policy.” Granted.

He immediately fenced it in by noting that even in such an eventuality, the trigger would not be the exchange rate per se, but rather its dampening impact on inflation. Moreover, he called recent euro gains “modest,” said they did not require a response, and rejected the premise of any line in the sand: “It would not be serious to have a target on the exchange rate — the target is on the inflation rate.”

Those are not the words of a policymaker chafing at the bit to cut. Indeed, the same Kocher only last Thursday — Econostream was the lone media outlet to report on it — sounded relaxed about the policy setting, arguing that the current level of interest rates “seems to be in line very well with the 2% inflation rate,” and repeatedly invoked “full optionality,” including the possibility of the next rate move “either going up or going down.”

More revealing, in that appearance he framed euro-dollar developments as a valuation story rather than a momentum story: on a purchasing power parity basis, “the euro is overvalued and the dollar is undervalued,” and — crucially — “since we are above already purchasing power parity, my expectation is at the moment that we don’t see a strong development in the same direction also in 2026.”

That last sentence is hard to square with any reading of Wednesday’s FT remarks as a near-term signal. If Kocher does not expect “a strong development in the same direction” this year, then a conditional warning about “further and further” appreciation is less a hint about February or March than the truism that, as a principle, persistent currency-driven disinflation would eventually have to be reflected in policy.

Bank of Lithuania Chair Gediminas Šimkus’ comments directly to Econostream put a timeline on what “eventually” actually means. Pressed on whether Trump’s apparent satisfaction with dollar weakness could be reason to cut, Šimkus rejected the premise that policymakers can “pick out just one element of a very complex overall picture and draw a strong conclusion about what should happen in terms of monetary policy.”

That restraint is more revealing because Šimkus himself deployed euro strength as part of the easing case last year. In a September interview with Econostream, after running through other disinflationary forces, he pointed to euro appreciation as well, arguing that a stronger euro makes imports cheaper and “further dampen[s] inflationary pressures.”

Now he cites that same bout of euro strength mainly to make the opposite point — that FX moves can be fleeting — recalling that “[i]n September, the euro almost hit USD 1.19” and warning against treating the level itself as policy guidance.

His broader message is that the exchange rate is “an expression of many things happening at the same time in the world,” and that “based on what we know now, I cannot conclude that we are already able to say that a future monetary policy move will need to be in any particular direction.”

Šimkus then did something even more significant for the easing narrative: he renounced his own earlier inclination to trim rates further — which helps explain why a further surge of the euro is unlikely to be enough, for now and on its own, to tip him back toward easing — and said last year’s openness to another cut was rooted in a darker growth view that has not materialized.

Pointing to the December projection round, he argued that activity has held up better than expected and that “headline and core measures [are] fluctuating around our medium-term target,” adding, “All this makes our near-term decisions obvious.”

Banque de France Governor François Villeroy de Galhau, by contrast, is the only one who is clearly using the euro as an active input into the policy debate. In a LinkedIn post, he wrote that the dollar was “falling significantly against most currencies, including the euro,” interpreting this as a sign of “reduced confidence” given the “unpredictability” of US economic policy.

He repeated the standard caveat — “The Eurosystem does not have an exchange rate target” — but added an unmistakably dovish emphasis: policymakers are “closely monitoring this appreciation of the euro and its possible implications for lower inflation,” calling it “one of the factors that will guide our monetary policy stance and interest rate decisions in the months ahead.”

There is nothing inconsistent here: Villeroy is one of the more reliably dovish voices on the Council, and euro strength is a convenient – indeed, welcome – way to keep downside inflation risk in the conversation without fighting the core fact that inflation has returned to target. The euro, in that sense, is a handy narrative bridge between “we’re at 2%” and “we still need maximum optionality.”

But a bridge is not a trigger.