The euro retreated in European trading on Friday against a basket of global currencies, resuming its losses versus the US dollar and moving away from a five-year high, amid renewed corrective moves and profit-taking, and under pressure from warnings issued by European monetary authorities over the euro’s excessive appreciation.

 

The euro’s rise above the $1.20 level earlier this week raised concerns among policymakers at the European Central Bank, who warned that a rapid strengthening of the currency could generate deflationary effects.

 

Despite the current pullback, the single European currency is on track to post its third consecutive monthly gain, supported by a broad selloff in US assets and following the historic trade agreement between the European Union and India.

 

Price Overview

 

• Euro exchange rate today: The euro fell against the dollar by 0.65% to $1.1865, from an opening level of $1.1971, after touching an intraday high of $1.1975.

 

• The euro ended Thursday up 0.15% against the dollar, after losing 0.7% the previous day amid corrective moves and profit-taking from a five-year high at $1.2082.

 

European Monetary Authorities

 

The euro’s move above the $1.20 threshold for the first time in five years has raised concerns among European monetary authorities, prompting ECB policymakers to issue a series of cautionary statements regarding the impact of a strong currency on inflation dynamics and economic growth.

 

Economists noted that euro strength could amplify the deflationary impact of strong Chinese exports, potentially pushing the ECB out of its “comfort zone” and forcing it toward further interest rate cuts.

 

Jeff Yu, EMEA macro strategist at Bank of New York, said that while the euro-dollar exchange rate last year remained well above the ECB’s baseline scenario without triggering strong deflationary risks, trade-related uncertainty remains elevated.

 

Ray Attrill, head of FX strategy at National Australia Bank, said he believes ECB remarks are independent, but noted that the $1.20 level appears to have acted as a clear trigger point.

 

Attrill added that the euro–dollar move, which until recently had not appeared particularly strong, arguably masks broader strength in the euro, which in turn feeds back into the ECB’s inflation outlook.

 

Monthly Performance

 

Over January trading, which officially concludes at today’s settlement, the single European currency is up more than 1.5% against the US dollar, putting it on course for a third straight monthly gain.

 

European Interest Rates

 

• ECB Executive Board member Isabel Schnabel said on Wednesday that monetary policy is “in a good place,” and that interest rates are expected to remain at current levels for an extended period, with financial markets pricing stability through early 2027.

 

• Money market pricing for a 25-basis-point rate cut by the ECB in February currently remains below 25%.

 

• Investors are awaiting further economic data from the euro area, particularly on inflation, unemployment, and wages, to reassess these expectations.

 

European Economy

 

Following the trade agreement with India, markets have grown more optimistic about the outlook for the European economy, as the strategic partnership helps diversify supply chains and expand the services sector’s footprint in a vast consumer market. This supports more sustainable European growth and reduces vulnerability to global trade disputes.

 

The European Union and India reached a historic trade agreement this week after nearly 20 years of negotiations, a deal described by European Commission President Ursula von der Leyen as the “mother of all deals.”