Euro gains on hawkish ECB policy outlook
- EUR/USD rises as hawkish ECB stance drives EUR gains as markets price in a September deposit rate hike to 2.50%.
- ECB official Schnabel warns Middle East conflict and economic strength present ongoing upside inflation risks.
- Strong US inflation data limits EUR/USD gains, keeping a December Fed rate hike probability above 70%.
EUR/USD edges higher after registering minor gains in the previous day, trading around 1.1650 during the Asian hours on Friday. The pair gains ground, bolstered by the European Central Bank’s (ECB) hawkish monetary policy outlook.
ECB Executive Board member Isabel Schnabel recently emphasized that borrowing costs must continue to rise, citing ongoing conflict in the Middle East and a surprisingly resilient Eurozone economy as major upside risks to inflation. Reflecting this hawkish sentiment, market expectations have shifted significantly, with the ECB Watch tool now pricing in nearly 96% odds of a deposit rate hike to 2.50% at the upcoming September policy meeting.
However, further gains for the EUR/USD pair remain capped due to persistent strength in the US Dollar (USD). Stronger-than-expected US inflation data released this week reinforced expectations that the Federal Reserve (Fed) will raise interest rates before the end of the year, maintaining a probability above 70% for a December hike. Meanwhile, market pricing for the Fed’s immediate September meeting leans toward patience, with approximately a 65% chance that interest rates will remain unchanged.
Meanwhile, forex traders are turning their focus to the annual economic symposium in Jackson Hole, Wyoming. Market participants are closely monitoring an upcoming speech by Federal Reserve Chairman Kevin Warsh, searching for potential signals regarding the direction of US monetary policy and interest rates.
Collins downplays inflation surprise, keeping Dollar bulls cautious
Fed’s Collins delivered a mildly less hawkish tone than usual, with the FXS Speechtracker score at 4.8/10 compared to the established baseline of 5.7/10, signaling reduced policy-intensity versus past remarks. The emphasis that current restrictive policy should still deliver “gradual disinflation,” and that portfolio management fees distorted headline inflation while market-based prices track closer to target, frames the latest data as a bump rather than a regime shift. By stressing that higher bond yields remain consistent with price stability and that, absent fresh tariff or oil shocks, inflation should ease, Collins leans toward patience rather than an imminent tightening pivot, tempering immediate upside for the Dollar.
The FXS Fed Sentiment Index fell 2.44 points to 129.11, indicating a modest pullback in perceived hawkishness following the speech. Despite the decline, the index remains firmly above the 100 neutral mark, underscoring that Fed communication is still hawkish in aggregate, even as Collins’ softer tone nudges the Dollar and broader risk sentiment away from the most aggressive policy expectations.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
