Fed Holds Steady as Germany Watches: ECB Grapples with Strong Euro Ahead of US Decision
FRANKFURT, 28 January 2026 – Global financial markets are in a holding pattern ahead of the US Federal Reserve’s first interest rate decision of the year, with Germany’s export-dependent economy caught between domestic weakness and international monetary policy crosscurrents. The Fed is widely expected to hold its benchmark rate steady at 19:00 GMT (20:00 CET), a pause that comes as the German government slashes growth forecasts and the European Central Bank voices mounting concern over the euro’s appreciation against a weakening dollar.
A German Economy at a Crossroads
The backdrop to today’s Fed meeting is a fragile European economic landscape. Earlier on 28 January, the German government officially lowered its growth forecasts for both 2026 and 2027, citing heightened uncertainty in global trade. This domestic softness contrasts with the performance of German equities; the DAX index edged higher in morning trading, a reminder that, as noted in a DWS Q4 2025 market update, over 80% of DAX earnings are generated abroad, largely insulating it from local economic woes.
Bundesbank President Joachim Nagel recently acknowledged that German inflation might dip below the ECB’s 2% target temporarily, but warned this should be short-lived. The longer-term trajectory remains uncertain, heavily influenced by external factors like exchange rates and foreign central bank actions.
The ECB’s Dollar Dilemma
While the Fed deliberates, the European Central Bank is grappling with the consequences of a shifting currency landscape. Multiple ECB policymakers, including France’s François Villeroy de Galhau, have flagged concerns over the euro’s rapid appreciation against the dollar. A stronger euro imports disinflation by making imports cheaper, complicating the ECB’s own policy path. Austrian National Bank Governor Robert Holzmann suggested the ECB might need to consider a fresh rate cut if the euro strengthens further, a sentiment echoed by other officials.
This creates a delicate dance: a more dovish Fed that weakens the dollar could force the ECB’s hand toward easier policy to counteract the deflationary impact and support the struggling German manufacturing sector—a sector historical research from the Fed (2024) notes is particularly sensitive to high interest rates.
Key Facts: The Fed Decision & German Context
| Event / Metric | Details & Implications for Germany |
|---|---|
| Fed Decision Time | 28 January 2026, 20:00 CET (19:00 GMT). Statement followed by Chair Powell’s press conference at 20:30 CET. |
| Consensus Expectation | Federal Funds Rate to be held steady. Markets will scrutinise the “dot plot” and Powell’s tone for future cut timing. |
| German Growth Forecasts (New) | Officially cut for 2026 & 2027 on 28 Jan due to global trade uncertainty, underscoring domestic vulnerability. |
| ECB’s Primary Concern | Euro/USD strength (~1.1990). A 10% euro rise can suppress inflation for years, per ECB estimates. |
| DAX Reaction | Opened slightly higher, demonstrating its decoupling from the domestic economy ahead of the Fed news. |
| Historical Spillover | Research (Curcuru, 2018) shows ~50% of German yield moves spill over to US Treasuries, and vice-versa, highlighting deep financial linkage. |
Markets in Waiting Mode
The immediate market reaction in Europe has been muted. The EUR/USD pair traded just below 1.2000, with investors hesitant to make large bets ahead of the Fed’s guidance. The dollar found a tentative footing after recent declines. For German exporters and the DAX, the stakes are high. A Fed that signals a prolonged pause or slower cutting cycle could support the dollar, offering some relief to Eurozone exporters. Conversely, any hint of accelerated future easing could turbocharge the euro’s rally, immediately putting pressure on the ECB to respond and dampening the overseas earnings outlook for Germany’s blue-chip companies.
Frequently Asked Questions
Why does a US interest rate decision matter so much for Germany?
Germany’s economy is deeply integrated into global trade and finance. US monetary policy affects the value of the euro against the dollar, which directly impacts the competitiveness of German exports. Furthermore, global capital flows are influenced by US rates, affecting investment and borrowing costs worldwide, including for German firms and the government.
What is the “spillover” effect mentioned?
Monetary policy spillover refers to how one central bank’s actions affect financial conditions in other countries. Academic studies, including a 2025 paper by Camara, quantify how US rate changes impact global markets. For Germany, a 2018 analysis from the Federal Reserve showed a significant two-way spillover between US and German government bond yields, meaning their financial markets are tightly coupled.
If the Fed holds rates, will the ECB cut soon?
Not necessarily. The ECB’s decision on 4-5 February will depend on Eurozone inflation and growth data. However, a major driver is now the exchange rate. If the Fed’s stance leads to a much stronger euro, it increases the probability of an ECB rate cut to counteract disinflationary pressures, even if the domestic economy is weak.