President Christine Lagarde during the Governing Council meeting at the ECB in Frankfurt, Germany, 23 July 2026. Photo: Dirk Claus/ECB.
The euro finds little support from the central bank's verification of market bets for a September rate hike.
The European Central Bank (ECB) retained existing policy settings during its July policy meeting while also opting not to push back against expectations for a rate hike at the September policy meeting.
June's inflation data proved comforting enough for the ECB to hold interest rates today, but upcoming inflation pick-ups and a jump in oil and gas prices mean action can't be avoided forever.
Those pipeline pressures are exactly why the market thinks the ECB will have to act in September, and the central bank knows it will have to oblige the market and deliver a hike in order to retain its credibility as an inflation-fighting institution.
"The renewed flare-up in the Middle East has pushed oil prices back up, increasing the risk of higher inflation. The eurozone economy has also proved surprisingly resilient, and Germany's fiscal stimulus package should provide an additional tailwind to growth over the coming months," says Tina Fong, Economist and Strategist at Schroders. "Taking all of this together, we expect the ECB to raise rates by 0.25% in September."
Why the Euro has Reacted in This Manner
For the euro, the prospect of a rate hike is well understood, and by dancing to the market's tune the central bank hasn't actually done enough to warrant a shift in the currency's fortunes on the day:
Euro-dollar is down a quarter of a per cent on the day at 1.1380, which puts it near the July range lows. Euro-pound is flat on the day at 0.8530.
"The euro is holding its earlier losses even after the European Central Bank left rates unchanged and signalled an openness to further tightening," says Karl Schamotta, analyst at Corpay. "With two hikes already priced in by early next year, policymakers are finding it difficult to out-hawk markets."
To be sure, we're seeing a spike in the dollar at the time of writing, and that risks over-egging the notion that today's ECB decision was a negative for the euro.
By all accounts, the central bank did enough to keep the single currency on an even keel; there's nothing that can be done to prevent the dollar from rallying across the board.
