EURUSD on Brink as ECB Decision Looms with Hawkish Tone

The European Central Bank (ECB) is expected to raise its deposit rate in September, and investors are eagerly anticipating this move. The ECB has been tightening policy since last year, when it first responded to rising energy prices linked to the conflict in the Middle East. This time around, consumer prices have reached a three-year high of 3.3% in August, with GDP growth accelerating to 0.6% in the second quarter of 2026.

However, hiking the deposit rate to 3% by mid-2027, as markets have priced in, will be difficult to justify. Rising oil and gas prices will reduce domestic demand and slow GDP growth, while an aggressive tightening of monetary policy will only exacerbate the eurozone economy's woes. The ECB must also be cautious not to add fuel to the fire of rising European bond yields.

The base-case scenario is that Christine Lagarde will adopt a cautious tone, which could put pressure on EURUSD after its rally, fueled by rumors of hawkish rhetoric from the ECB. This will take place against the backdrop of the debt market's reaction to the US Treasury's announcement on the volume of Treasury buybacks.