Introduction
The European Central Bank (ECB) decided on interest rates on Thursday evening Taiwan time, cutting each of the three major rates by 25 basis points, with the deposit rate lowered from 2.25% to 2%, close to the neutral rate. This marks the ECB's eighth consecutive interest rate cut in the past year, primarily due to controlled inflation and concerns that tariffs could negatively impact the future of the European economy. President Lagarde indicated that the Eurozone's rate-cutting cycle has reached its end, which also provides strong support for the Euro.
Once this news broke, Bitcoin rose by 4.38% from $101,039 by Friday. Historically, it is clear that when interest rates are lowered and market liquidity increases, the cryptocurrency market generally benefits, and this time, the European Central Bank's interest rate cut is no exception. Besides that, this article will help you understand the current state of the European economy, future interest rate cut expectations, and the surprising discovery that BTC has a positive correlation with the Euro.
Overview of key points in this article
Current economic overview of Europe
In the long run, economies of various countries will generally experience a 3-4 year business cycle, forming a complete cycle from economic expansion, growth slowdown, recession, to industry recovery. The reason for such a regular cycle every 3-4 years is related to adjustments in inventory depletion and replenishment in the manufacturing sector.
Manufacturing expansion cycle (passive inventory depletion): In a new economic cycle, there is a high expectation for new topics. Examples include the .com boom in 2000, the mining boom and Bitcoin value surge in 2017, the economic recovery after the pandemic in 2021, and even the expansion of AI data centers and HPC (High-Performance Computing) topics in 2024, as well as the ongoing expansion and monetization of AI applications, all belong to the economic expansion phase. Strong end demand drives new order recovery, and businesses anticipate increased future revenues and profits, leading to higher production and hiring, entering the passive inventory depletion phase.
Proactive inventory replenishment: Accumulation of unfinished orders, extended delivery times from suppliers, and after delivery, downstream manufacturers will gradually reduce new orders based on end demand, which is commonly referred to as proactive inventory replenishment.
Manufacturing decline cycle (passive inventory depletion): End demand is low, but strong supply remains. As a result, manufacturers' inventories begin to accumulate, and once manufacturers realize this, they will reduce production and cut back on manpower.
Proactive inventory depletion: End demand is moderate, supply adjusts downwards, and upstream and downstream manufacturers carry out inventory depletion. Only when downstream manufacturers see an increase in market demand will they begin to increase new orders again, returning to the first phase of passive inventory depletion.
The Eurozone, which integrates the economies of 20 countries, can also conclude, based on the table below, that the Eurozone is currently experiencing the first stage of passive inventory depletion in manufacturing, following a 3-4 year economic cycle.
Changes in Eurozone GDP from the beginning of the year to now
Trump threatened to impose tariffs on January 20, leading to a rush in the manufacturing sector to pull inventory ahead of time. Although there was a pause in between, the situation of early inventory pulling continued with the equal tariffs being delayed by 90 days. The recent estimate for the Eurozone's Q1 2025 GDP growth rate is 0.6%, significantly revised up from the previous 0.3%, with the reason for the revision being the early inventory pull.
Observing the changes in the components of GDP in the chart below, it is evident that imports (brown), exports (dark gray), and corporate investment (yellow) have increased most significantly. However, this prosperity is not expected to continue until the end of 2025, with GDP growth projected to start slowing in the second quarter, with economists expecting the Eurozone's second-quarter GDP to be around 0.2%.
Resistances and supports for future economic growth in the Eurozone
For the longer-term future, the European Central Bank predicts that the economic growth rate will increase by 0.9%, 1.1%, and 1.3% from 2025 to 2027, with limited adjustments to economic growth. In the short term, uncertainty regarding tariffs is putting pressure on corporate investment and exports, but several factors are maintaining economic resilience, supporting medium-term growth.
The labor market is strong, with an unemployment rate of 6.2%, the lowest level since the Euro was established.
Recent announcements regarding increased defense and infrastructure investment (Germany's fiscal expansion)
Eight interest rate cuts have provided businesses with more relaxed financing conditions, supporting medium to long-term economic growth.
Current inflation situation and potential future inflation
Currently, the U.S. Federal Reserve is in a dilemma as the economy is not strong enough. It wants to stimulate the economy by cutting interest rates but faces the risk of rising inflation. In the Eurozone, this concern does not exist. The current inflation level has already fallen to around the 2% neutral interest rate, and the Consumer Price Index (HICP) is at 1.9%, down from 2.2% in April, meeting market expectations (May being lower than April reflects the impact of the Easter holiday in April leading to increased travel and airfare prices, which is normal).
Generally, it is hoped that the inflation rate remains at 2% to allow economic growth without causing economic activity to shrink due to inflation falling below 2%. Therefore, the Eurozone has also initiated interest rate cuts to stimulate further economic expansion while not worrying excessively about inflation rising.
Additionally, the slowdown in wage growth indicates effective anti-inflation measures. In Q1 2025, the Eurozone's per capita employee wage annual growth rate fell from 4.1% in Q4 2024 to 3.8%. This growth rate is still above the 3% needed to maintain price stability (with a long-term inflation target of 2% and productivity growth of 1%), and the slowdown in wage growth in the Eurozone, approaching levels consistent with price stability, can be seen as a sign of successful anti-inflation efforts.
How to view potential inflation in the Eurozone?
If we look at the national economic accounting report, compared to 2022 and 2023, profit growth (blue) has significantly slowed and no longer contributes significantly to Eurozone inflation, and this trend is expected to continue. The labor cost (orange) contribution to inflation is also weakening.
Energy inflation is expected to remain low. Previously, Trump hoped to offset the inflation caused by rising prices due to tariffs through declining energy inflation, which pressured OPEC to increase oil production, leading to higher oil output and lower oil prices. With tariffs continuing, it is speculated that energy inflation will remain low. While the manufacturing sector is showing moderate growth due to early inventory pulls, signs of a slowdown are emerging in the service sector, and current inflationary pressures are relatively weak.
Future expectations for EUR/USD
Combining the economic data just mentioned (unemployment rate, GDP, inflation rate, etc.), we can roughly depict the profile of the European economy as steady employment, moderate consumption, and mild manufacturing and service sectors. The news that the market has already priced in reflects the general view that the tariffs are merely a smokescreen for negotiations between countries and the U.S. The rapid drop in tariffs from over 245% to 30% during the U.S.-China negotiations gives countries confidence that unreasonable high tariffs, whether 145% or 245%, will not result in exports, and increasing tariffs by 100% only reflects Trump's anger without meaning. After various countries present sincere conditions for negotiation with Trump, tariffs have also declined accordingly.
The EU is not simply being pressured by the U.S. during tariff negotiations. The EU proposed a dual-track system, suggesting zero-for-zero tariffs and prepared a counter-list worth $28 billion for retaliation, also reserving the right to expand countermeasures against digital services such as Netflix.
On May 23, Trump threatened to impose a 50% tariff on EU goods, although he did not elaborate on which goods were involved. The reason for the taxation was simply due to slow negotiation progress, and Trump called the EU very difficult to deal with. Subsequently, on May 26, he spoke with the President of the European Commission and agreed to postpone the implementation of the 50% tariff from June 1 to July 9. There has been no new progress as of now.
It was also discovered that the stock market did not react to the negative news of actual tariffs being imposed. Last week, the Trump administration raised global tariffs on steel and aluminum from 25% to 50%, but the market seems to have anticipated that Trump would always back down at the last minute, and that the high tariffs would eventually be retracted. Meanwhile, the controversial section 899 of the recently discussed large and beautiful bill caused capital to quickly flee the U.S. The table below also shows a significant trend of reduced net international investment positions in the U.S. in recent years.
For detailed content, please refer to this week's market news weekly report
Factors affecting the Euro's performance in the next six months
The reasons we expect the Euro to continue to rise are: (1) The market gradually loses trust in U.S. assets, evidenced by previous surges in U.S. Treasury yields and the gradual decline of the dollar index. Of course, U.S. assets still offer good investment returns and will remain central in asset allocation, but the proportion of non-U.S. assets such as European bonds, European stocks, Japanese bonds, and emerging market assets is increasing, making it one of the reasons for the Euro's relative rise against the dollar. (2) Germany is implementing corporate tax reduction laws and fiscal expansion measures. Germany is willing to borrow to replace military and outdated public facilities, which is an unprecedented loosening of the 'debt brake' in Germany. This move not only stimulates the economy but also rekindles investors' interest in European assets, boosting long-term government bond yields.
In the next three to six months, it is unlikely that Trump will sit idly by. Compared to the U.S., the economic situation in the Eurozone is relatively stable. Specifically, equal tariffs are set to take effect in July, and recently, Trump has been urging (or threatening) countries to release goodwill quickly to avoid tariffs. This week, he also imposed tariffs on steel and aluminum. Compared to the U.S., Europe is not expected to take more action than the U.S., and whether through fiscal expansion, post-war reconstruction needs in Ukraine, or interest rate cuts providing strong support to the Euro, Europe will have cheaper steel and aluminum than the U.S. after the tariffs are imposed. Overall, the news is positive.
The chart shows that BTC and the U.S. dollar index have shown a negative correlation over the past five years. Additionally, the paper titled 'The Relationship between Bitcoin and Nasdaq, U.S. Dollar Index and Commodities' investigated data from 2017 to 2023 and observed the same conclusion of a significant negative correlation between 'BTC and the U.S. dollar index.' It was also found that BTC has a significant positive correlation with the Nasdaq index and oil prices, while the correlation between BTC and gold is not significant.
The negative correlation between BTC and DXY as an economic intuition
When the Federal Reserve adopts a tight monetary policy and raises interest rates, the dollar appreciates relative to other currencies. This can be understood as many foreigners wanting to exchange their currencies for dollars to invest in high-return assets like U.S. stocks and bonds, which in turn drives up the dollar. However, a tight monetary policy is not conducive to further capital flowing into high-risk assets like BTC, as the central bank aims to withdraw hot money from the market by raising interest rates. Alternatively, BTC/USD can be understood that when USD appreciates (the dollar index rises), the relative value of BTC will weaken.
Furthermore, the U.S. dollar index is a weighted average of the exchange rates of the dollar against six major international currencies, with the Euro accounting for 57.6%. In other words, 'Euro appreciation' implies 'Dollar depreciation,' and there is a connection that 'BTC will perform stronger.'
