Euro Weakens Despite ECB Rate Hike

The euro weakened toward $1.16 after the ECB raised rates as expected and upgraded its inflation and growth forecasts, while the dollar strengthened on higher oil prices and US PPI data. The ECB delivered its second rate hike since the US-Iran war began, warning that inflation is likely to remain well above its 2% target for an extended period. The central bank kept its 2026 inflation forecast at 3.0% but raised projections for 2027 and 2028 to 2.5% and 2.1%. GDP growth forecasts were also upgraded to 0.9% for 2026 and 1.4% for 2027. Renewed energy-price pressures are adding to the inflation outlook, with Brent crude hitting $105 a barrel and European gas prices reaching fresh three-and-a-half-year highs amid escalating Middle East tensions. Markets now price another ECB hike by December and further tightening in 2027. Elsewhere, the dollar remained supported after stronger-than-expected US PPI lifted the implied probability of a Fed hike to over 70%.

The euro edged up to $1.164, its strongest level since late August, as investors positioned ahead of today’s European Central Bank policy decision. Policymakers are widely expected to raise interest rates while maintaining their data-dependent stance, with the ongoing US-Iran war adding to uncertainty around the inflation outlook. Brent crude hit $100 a barrel for the first time since July 24, while European natural gas prices climbed to fresh three-and-a-half-year highs, as escalating tensions in the Middle East have heightened concerns over energy supplies. Markets are now pricing in two ECB rate hikes in 2026, with the deposit rate expected to reach 3.1% by late 2027. A Reuters poll published on September 3 showed economists expected the ECB to raise rates on Thursday for a second time, before bringing what would be its shortest rate-hiking cycle in 15 years to an end.

The euro stabilized around $1.16 as investors looked ahead to the European Central Bank’s policy meeting later this week, while rising oil prices added to inflation concerns. Brent crude approached $100 a barrel, while European natural gas prices rose to their highest level since late 2022 amid renewed tensions in the Middle East and reports that Iran and Oman were close to an agreement on managing shipping through the Strait of Hormuz, heightening concerns over Tehran’s growing influence over the key waterway. Persistent inflation pressures and resilient economic growth are keeping central banks under pressure to maintain a restrictive policy stance. The ECB is widely expected to raise interest rates on Thursday, with markets almost fully pricing in another hike by year-end. In the US, investors are awaiting key inflation data later this week, after Friday’s strong jobs report lifted the probability of a Fed rate hike next week to nearly 60%, providing further support for the dollar.