Why Markets Expect a September ECB Rate Hike—and What It Means for the Euro

Markets are treating a September ECB hike as close to a base case. The latest cited market gauges put the probability of a 25-basis-point increase at about 95%, taking the deposit rate from 2.25% to 2.50% on September 10, 2026.1314 That would be the second increase of the year after the ECB’s June move.

The repricing is being driven by an uncomfortable combination for policymakers: energy costs have pushed inflation further from the ECB’s 2% target, while economic activity has remained resilient enough to leave room for additional tightening. For currency markets, the result is a more supportive relative policy backdrop for the euro—but one that remains highly sensitive to U.S. data and central-bank communication.

Why the September hike is nearly priced in

Energy inflation has become a persistent-policy problem

The immediate catalyst is the energy shock linked to the prolonged Middle East conflict. The ECB held its deposit rate at 2.25% in July but said it was monitoring the intensity and duration of the shock, along with its indirect and second-round effects.5 That language left the door open to further tightening rather than treating the energy increase as a temporary headline-inflation disturbance.

The concern is that higher energy prices can feed into broader prices and keep inflation above target for longer. A Reuters poll published in August found that 57 of 69 economists expected a 25-basis-point hike in September, with the deposit rate reaching 2.50%.3 Earlier ECB reporting also showed markets pricing a June hike followed by another move in September, while the expected number of later increases varied with oil prices.1

Inflation data have reinforced that concern. A June Reuters poll reported euro-area inflation at 3.2% in May and core inflation at 2.5%, suggesting that the shock was reaching beyond energy and food prices.4 Another Reuters poll said euro-zone inflation had reached 2.9% and that oil prices remained around 25% above pre-war levels.3

Activity has not weakened enough to block tightening

The ECB is not tightening into an economy that the supplied evidence describes as collapsing. Nomura strategists cited euro-area GDP excluding Ireland as growing around potential despite the conflict, while forecasting inflation at 2.8% and another 25-basis-point ECB hike in September.8

That resilience gives policymakers more scope to focus on inflation risks. It also helps explain why markets have moved beyond a simple “one-and-done” interpretation: Reuters reported growing bets that geopolitical pressures could eventually lift the ECB deposit rate close to 3% by late 2027.2 Those longer-term expectations remain less certain than the September move, but they show how the market’s assessment of the policy path has changed.

How the ECB differs from the Federal Reserve

The clearest contrast in the available evidence is between an ECB being repriced toward tightening and a Federal Reserve that markets expect to remain cautious in the near term.

Softer U.S. inflation data have given the Fed more room to avoid an immediate rate increase. Reuters reported that traders had sharply reduced bets on a September Fed hike, with the implied probability falling to 30.6% from 52.2% a week earlier.21 Another Reuters report said markets were pricing a more dovish Federal Reserve response after softer economic data.18

That divergence matters because exchange rates respond to the direction of expected interest rates, not simply to the current level of policy. If ECB expectations move higher while Fed expectations remain stable or shift lower, the dollar loses some of its expected short-term yield advantage. That can support the euro even if European growth is not especially strong.

The available sources provide much stronger evidence for this ECB–Fed comparison than for a detailed claim about the Bank of England’s policy path. Sterling has weakened against the euro and dollar at points during the period covered by the sources, but the supplied evidence is not sufficient to attribute that move specifically to cooling UK inflation or weaker growth.1820

What the policy repricing means for EUR/USD

The euro’s recent strength is consistent with both sides of the rate differential moving in its favor. The ECB is expected to deliver another hike, while traders have reduced expectations for an imminent Fed increase. The euro reached a two-month high near $1.17 before retreating, and EUR/USD was around 1.1655 on August 25.2028

That retreat does not, by itself, establish a reversal. It is also consistent with investors taking profits or reducing exposure before major U.S. events. Reuters reported that the dollar had fallen to a three-month low against the euro on August 21, when the euro briefly reached $1.1711.20

The near-term bias therefore remains mildly euro-positive, but the trade is event-sensitive rather than one-way. July PCE inflation data arrive immediately before the Federal Reserve chair’s Jackson Hole appearance, making both the inflation reading and the speech important tests of current Fed expectations.26 The Jackson Hole speech has taken on additional market significance as investors look for guidance on bond yields, near-term policy and the Fed’s independence.23

A hotter-than-expected U.S. inflation reading or a hawkish Fed message could revive dollar demand. Conversely, evidence of persistent euro-area inflation would reinforce the market’s September ECB view. The main euro-specific risk is a material downside surprise in inflation—particularly if it makes another hike look less necessary.

The bottom line

Markets are pricing the September ECB move because energy-related inflation has become persistent enough to warrant additional restraint, while euro-area activity has remained resilient. The latest cited gauges show about 95% odds of a 25-basis-point hike to 2.50%, slightly above the roughly 93% probability in the original market framing.1314

For EUR/USD, the key support comes from relative policy repricing: a hawkish ECB against a more cautious Fed reduces the dollar’s expected rate advantage. That supports the euro, but upcoming U.S. PCE data and Jackson Hole communication could produce sharp temporary moves. The constructive euro view remains credible unless euro-area inflation falls materially short of expectations or the Fed unexpectedly signals a more aggressive tightening path.