ECB Rate Hike Falls Short Amid US Inflation Surge
The European Central Bank (ECB) raised interest rates and expressed optimism about the economy, but its hawkish stance had little impact on the euro. The EUR/USD was instead influenced by accelerating inflation in the US, which reinforced expectations of a Fed rate hike.
US producer price growth accelerated to 5.4% year-over-year, reversing recent progress made on inflation. This led to a reassessment of expectations for the Consumer Price Index (CPI) and the likelihood of a Fed rate rise.
The ECB's deposit rate increase from 2.25% to 2.5% was met with a strong headwind for the EUR/USD, but it failed to derail the dollar's upward trajectory. The bank's emphasis on being data-dependent suggested a reluctance to continue policy tightening, at least in the short term.
Markets are now focused on the upcoming FOMC meeting and the potential for further monetary tightening. The probability of two rounds of rate hikes in 2026 has increased from 49% to 63%, with expectations for the CPI being revised upwards.