Did the ECB Rate Cut Not Only Save the Economy but Also Boost BTC?
The Hidden Link Between the Euro and Cryptocurrencies
Foreword
On Thursday evening Taiwan time, the European Central Bank (ECB) cut each of its three key interest rates by a quarter point, with the deposit rate falling from 2.25% to 2%, nearing the neutral rate. This marks the ECB's eighth consecutive rate cut in the past year, driven primarily by controlled inflation and concerns about the potential negative impact of tariffs on the future European economy. President Christine Lagarde stated that Europe's rate-cutting cycle has reached its end, which provides strong support for the Euro.
Following this news, as of Friday, Bitcoin surged by 4.38% from $101,039 at one point. Historical trends clearly show that when interest rates are cut and market liquidity increases, the cryptocurrency market generally benefits, and this ECB rate cut was no exception. Beyond this, this article will guide you through the current state of the European economy, future rate cut expectations, and the surprising discovery of a positive correlation between BTC and the Euro.
Current Economic Overview of Europe
In the long term, national economies generally experience a 3-4 year business cycle, forming a complete loop from expansion, slowing growth, recession, to industry recovery. The reason for this regular 3-4 year cycle is actually related to inventory adjustments in the manufacturing sector, including inventory reduction and inventory replenishment.
Manufacturing Upturn Cycle (Passive Inventory Drawdown): In a new business cycle, there's high anticipation for new themes. Examples include the dot-com boom in 2000 that led to soaring internet company valuations, the crypto mining craze and Bitcoin's value surge in 2017, the economic recovery after the pandemic in 2021, and even themes like AI data center expansion and HPC (High-Performance Computing) in 2024, as well as the current expansion and gradual monetization of AI applications—all fall into the economic expansion phase. Strong end-demand drives new order recovery, businesses anticipate increased future revenue and profits, and they scale up production and hire more staff, entering the passive inventory drawdown phase.
Active Inventory Replenishment: Unfilled orders accumulate, supplier delivery times lengthen. After delivery, downstream manufacturers gradually reduce new orders based on end-demand, which is commonly referred to as active inventory replenishment.
Manufacturing Downturn Cycle (Passive Inventory Buildup): End-demand is low, but strong supply persists. Consequently, manufacturers' inventories begin to pile up. Once aware, manufacturers reduce production and cut back on labor.
Active Inventory Drawdown: End-demand is moderate, and supply is adjusted downwards. Upstream and downstream manufacturers deplete their inventories. Only when downstream players observe rising market demand do they start increasing new orders again, returning to the first passive inventory drawdown phase.
The Eurozone, which integrates the economic development of 20 countries, also aligns with the conclusion of a 3-4 year business cycle, as shown in the table below. Based on this cycle, it's assessed that the Eurozone is currently entering the manufacturing passive inventory drawdown phase (Phase 1).
Eurozone GDP Changes Year-to-Date
Upon taking office on January 20th, Trump immediately threatened action on tariffs, which spurred an early surge in manufacturing orders. Although there was a brief pause, the early procurement continued as reciprocal tariffs were delayed by 90 days. Recently, the Eurozone's Q1 2025 GDP growth rate was estimated at 0.6%, a significant upward revision from the previous 0.3%. This upward revision for Q1 GDP growth is directly attributed to that early order surge.
Looking at the detailed breakdown of GDP components in the chart below, the most notable increases are in imports (brown), exports (dark grey), and business investment (yellow). However, this robust performance is not expected to last until the end of 2025. The GDP growth rate for the second quarter is projected to start slowing down, with economists forecasting Eurozone Q2 GDP to be around 0.2%.
Headwinds and Tailwinds for Eurozone Economic Growth
Looking further ahead, the European Central Bank (ECB) forecasts economic growth rates of 0.9%, 1.1%, and 1.3% for 2025-2027, with limited revisions to economic growth. While short-term challenges from tariff uncertainties are pressuring corporate investment and exports, several factors are maintaining economic resilience and supporting medium-term growth:
Strong Labor Market: The unemployment rate of 6.2% is the lowest since the euro's inception.
Recent Announcements of Increased Defense and Infrastructure Investment: Such as Germany's fiscal expansion.
Eight Interest Rate Cuts: These have provided businesses with more favorable financing conditions, bolstering medium to long-term economic growth.
Current Inflation Status and Future Potential Inflation
Currently, the U.S. Federal Reserve faces a dilemma: the economy isn't strong enough, and while they want to stimulate it with interest rate cuts, they also face the risk of rising inflation. However, this concern isn't present in the Eurozone. Current inflation is hovering around the 2% neutral rate, with the Harmonized Index of Consumer Prices (HICP) at 1.9%, lower than April's 2.2%, which aligns with market expectations (May's figure being lower than April's reflects the normal increase in travel and airfare prices due to the Easter holidays in April).
Generally, a 2% inflation rate is desired to allow for economic growth without inflation falling below 2% and leading to economic contraction. Therefore, the Eurozone has initiated rate cuts to further stimulate economic expansion, without significant concerns about surging inflation.
Furthermore, the slowdown in wage growth indicates effective anti-inflation measures. In Q1 2025, the Eurozone's year-over-year average employee wage growth decreased from 4.1% in Q4 2024 to 3.8%. While this growth rate is still higher than the 3% needed to maintain price stability (2% inflation target + 1% long-term productivity growth), the slowing wage growth in the Eurozone, gradually approaching a level consistent with price stability, can be seen as a sign of successful inflation containment.
How to View Potential Inflation in the Eurozone?
From the national accounts report, compared to 2022 and 2023, profit growth (blue) has significantly slowed down and no longer makes a substantial contribution to Eurozone inflation; it is expected to continue slowing in the future. Meanwhile, the contribution of labor costs (orange) to inflation is also diminishing.
Energy inflation is expected to remain low. Previously, Trump aimed to offset tariff-induced price increases by driving down energy inflation, thus pressuring OPEC to boost oil production. This led to increased oil supply and falling oil prices. Given the ongoing tariffs, it's inferred that energy inflation will stay subdued. With manufacturing showing moderate growth in Q1 due to front-loaded orders and signs of a slowdown in the services sector, current inflationary upward pressure remains weak.
Euro/USD Future Outlook
Based on the economic data we've discussed (unemployment rate, GDP, inflation rate, etc.), we can broadly outline the European economy as having stable employment, moderate consumption, and mild performance in manufacturing and services. The market has largely "priced in" the notion that tariffs are merely a facade for the U.S. to push other countries into negotiations. The smooth progress in U.S.-China talks, where tariffs initially exceeding 245% instantly dropped to 30%, has given other nations a clear understanding: unreasonably high tariffs (whether 145% or 245%) would simply stop manufacturers from exporting. An additional 100% tariff would serve no purpose beyond reflecting Trump's "anger level." After countries presented sincere conditions and negotiated with Trump, tariffs subsequently decreased.
The EU has not been a passive target in tariff negotiations. It proposed a two-track approach, suggesting "zero-for-zero" tariff negotiations, while also preparing a counter-list valued at $28 billion for retaliation. The EU also reserved the right to expand countermeasures into other areas, such as digital services like Netflix.
On May 23rd, Trump threatened to impose 50% tariffs on EU goods, though he didn't specify which goods, and that wasn't the main point. The justification for the tariffs was merely slow progress in negotiations, with Trump even calling the EU "very difficult to deal with." Subsequently, in a May 26th call with the President of the European Commission, Trump agreed to postpone the implementation of the 50% tariffs from June 1st to July 9th. There have been no new developments since.
Furthermore, we've observed that the stock market has not reacted negatively to the actual imposition of tariffs. Last week, the Trump administration increased global steel and aluminum tariffs from 25% to 50%, but the market seems to have already anticipated that "Trump always chickens out," expecting the high tariffs to be withdrawn after a few days. Concurrently, Section 899 of the highly debated "Big and Beautiful" bill last week triggered a rapid outflow of capital from the U.S. The table below also shows a significant decline in the U.S. net international investment position in recent years.
Factors Influencing the Euro's Performance Over the Next Six Months
We anticipate the Euro will continue to appreciate for two main reasons:
Growing Market Distrust in U.S. Assets: This is evident from the previous surge in U.S. Treasury yields and the gradual decline of the U.S. Dollar Index. While U.S. assets remain excellent investment opportunities and will continue to be central to asset allocation, investors are increasing their allocation to non-U.S. assets, such as European bonds, European equities, Japanese bonds, and emerging market instruments. This trend is one reason for the Euro's continued strength against the U.S. dollar.
Germany's Implementation of Corporate Tax Cuts and Fiscal Expansion Measures: Germany has boldly taken on debt to replace military equipment and outdated public infrastructure. This unprecedented loosening of its "debt brake" policy not only stimulates the economy but also renews investor interest in European assets, while pushing up long-term government bond yields.
Over the next three to six months, Trump is unlikely to remain idle. Compared to the U.S., the economic state of the Eurozone is one of steady growth. Specifically, with reciprocal tariffs set to take effect in July, Trump has recently been urging (or threatening) countries to quickly show goodwill to avoid tariffs, and steel and aluminum tariffs were also imposed this week. Compared to the U.S., Europe won't be making as many moves in the near term. Moreover, fiscal expansion, post-war reconstruction needs in Ukraine, and interest rate cuts all provide strong support for the Euro. After the steel and aluminum tariffs, Europe will also have access to cheaper steel than the U.S. Overall, these are all positive developments.
As the chart shows, BTC and the U.S. Dollar Index have displayed a negative correlation over the past five years. Furthermore, a study titled "The Relationship between Bitcoin and Nasdaq, U.S. Dollar Index and Commodities," which examined data from 2017 to 2023, reached the same conclusion: a significant negative correlation between "BTC and the U.S. Dollar Index." The paper also found a significant positive correlation between BTC and the Nasdaq Index, as well as BTC and oil prices, while the correlation between BTC and gold was not significant.
Economic Intuition Behind BTC and DXY's Negative Correlation
When the Federal Reserve adopts a tight monetary policy and raises interest rates, the U.S. dollar appreciates against other currencies. This can be understood as many foreign investors wanting to convert to USD to invest in higher-yielding assets like U.S. stocks and bonds, which in turn strengthens the dollar. However, a tight monetary policy is unfavorable for further capital flows into high-risk assets like BTC, as the central bank raises rates precisely to withdraw excess liquidity from the market. Alternatively, you can think of BTC/USD as: when USD appreciates (i.e., the U.S. Dollar Index rises), the relative value of BTC weakens.
Furthermore, the U.S. Dollar Index (DXY) is a weighted average of the dollar's exchange rates against six major international currencies, with the Euro accounting for 57.6% of its weighting. In other words, "Euro appreciation" implies "U.S. dollar depreciation," which is correlated with "BTC having stronger performance."
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