ECB: Economic Effects of the 2025 Euro Rally May Not Be Fully Visible Until Late Spring

European Central Bank officials say the full consequences of the euro’s appreciation that began in 2025 remain incomplete and may only become evident with roughly a twelve-month lag. A member of the ECB Governing Council noted that exchange-rate changes typically feed into inflation and activity with substantial delay, and internal estimates point to the late spring of 2026 as the likely timeframe for a fuller assessment. Meanwhile, currency markets have accelerated purchases that pushed the euro toward about $1.20 versus the dollar, a move driven by softer dollar momentum, evolving rate expectations and public signals from U.S. policymakers interpreted by traders as a structural headwind for the dollar. That market action has lifted volumes in forwards and options and increased demand for FX hedges among firms with dollar revenues. The firmer euro reduces imported inflationary pressure — easing the pass-through into consumer prices — but also erodes competitiveness for exporters and can squeeze dollar-reported revenues when converted to euros. Those competing effects mean the net impact on euro-area growth and headline inflation is ambiguous and dependent on the pace and persistence of the currency move, shifts in trade volumes, and domestic price dynamics. Market repricing has also narrowed the window for further ECB tightening: recent surveys and derivatives markets now show growing conviction that the bank will hold policy steady rather than push for more hikes in the near term. The combination of a delayed exchange-rate pass-through and an already-tightened market view complicates policy calibration, as data today reflect a different currency environment than that likely to be observed once the full effects arrive. Corporates and banks have responded by revisiting guidance, increasing hedges and rebalancing portfolios, while cross-border flows and short-term FX liquidity have fluctuated as traders adjust positions. For the ECB, the sensible path appears to be a patient, evidence-driven approach — monitoring incoming trade, price and wage signals through the late-spring checkpoint before committing to major changes in the policy stance.