European Central Bank (ECB) President Christine Lagarde announced on Thursday that the ECB would keep its key interest rate unchanged at 2%, marking the third consecutive pause. Over the past year, the ECB had cut rates by a cumulative 2 percentage points before halting further reductions this summer. This decision came just a day after the U.S. Federal Reserve implemented its second rate cut of the year, highlighting a growing policy divergence between the two central banks.

The widening gap has raised market concerns, as differing monetary policies could drive the euro higher, weaken export competitiveness in the eurozone, and add inflationary pressures.

At a press conference, Lagarde stated that the ECB is currently in "a good place," with inflation nearing its 2% target. She also noted that recent U.S. tariff agreements with multiple countries have eased global trade tensions. However, she cautioned that "we remain in a period of high uncertainty."

Export-dependent economies have faced pressure from U.S. tariffs and a 12% surge in the euro against the dollar this year. Yet recent business surveys suggest the eurozone economy is showing signs of recovery. Additionally, Germany’s planned increases in infrastructure and defense spending are expected to support growth next year.

Latest data shows the eurozone’s annualized growth rate for Q3 stood at 0.9%, outperforming market fears. Lagarde expressed that she is "not pessimistic about current growth."

Markets widely believe the ECB’s rate-cutting cycle is nearing its end, with less than a 40% probability of another cut by late 2026. However, analysts warn that if the euro remains strong—keeping import prices low and inflation subdued—the ECB may be forced to ease policy further, especially if the Fed continues cutting rates, widening the interest rate gap.

Carsten Brzeski, ING’s Global Head of Macro, suggested that if euro strength persists, "the ECB might cut again in December or early next year," despite its current stance of pausing.

As U.S. and European policy paths continue to diverge, markets will closely monitor the euro’s trajectory, tariff impacts, and the eurozone’s economic resilience in the coming months.