Euro Gains Support as ECB Rate Hike Becomes Market Consensus

Expectations of an interest rate hike by the European Central Bank (ECB) have led to increased support for the euro against the US dollar. Market consensus suggests that the ECB will raise its deposit facility rate from 2.25% to 2.50%, with some economists believing this may be the second rate increase since 2026.

Felix Fether, an economist at Aberdeen, stated that the rate hike is 'almost a foregone conclusion,' but it's the ECB's subsequent policy path that truly matters. If the central bank releases hawkish language, market expectations for further hikes by year-end may rise, pushing up the euro and European government bond yields.

The resilience of the eurozone economy has exceeded prior expectations, with high energy prices, strengthening forward-looking wage indicators, and rising inflation expectations forcing policymakers to remain attentive to upside risks. The ECB's policy environment has changed significantly compared to the past, with international energy prices on the rise due to Brent crude oil breaking through $100 per barrel.

The eurozone inflation rate rose to 3.3% in August, above the ECB's 2% target, while core inflation continues to decline. This indicates that current inflationary pressures differ from those during the previous energy crisis, with energy prices being the primary driver but no clear wage-price spiral formed.