The European Central Bank (ECB) next meets on Thursday (June 5th). Investors expect a quarter-point cut to come from this one, which would pull interest rates down to 2%. That’s the same size of cut the ECB approved in April, when it lowered the benchmark deposit facility rate to 2.25% – the lowest level since early 2023.

The central bank is expected to forecast future inflation to stay below the 2% target. That reduces the need for higher rates to regulate prices. At the same time, the tired economy could use the relief of a trim.

The central bank will likely reduce its growth outlook for Europe’s economy this year, predicting damage from US tariffs and the eurozone’s retaliation. The size of that impact is yet to be seen – but broadly speaking, the higher the tariffs, the bigger the punch.

Two other factors are putting pressure on inflation. For one, the euro has risen by around 4% against a basket of currencies – 8% against the US dollar since February. That stronger currency makes it cheaper to import goods, which feeds into lower prices for the end consumer. For another, market prices for oil and gas have fallen by around 25%.

Investors have toured Europe’s investment scene recently, eager to diversify their previously US-focused portfolios. That has pushed the Stoxx Europe 600 index almost 8% higher this year. However, the index still has a valuation of just over 14 times its price-earnings ratio (based on 12 months forward estimates) – almost in line with its 20-year history. In simpler terms, it’s trading at a 35% discount to US stocks. Even when you adjust for different sectors, you’ll see a roughly 24% discount. Chasing a rally isn’t usually a recommended strategy – but if concerns about the stability of the US continue, so might the flow into European stocks.