The European Central Bank left all three of its key interest rates unchanged, as widely expected, and President Christine Lagarde said future policy decisions will remain firmly dependent on incoming data. Recent economic indicators point to a modest improvement in activity, while underlying inflation appears contained. However, policymakers are paying closer attention to inflation risks linked to higher energy prices and continuing geopolitical tensions.

The ECB's decision to leave policy rates unchanged was unanimous. Recent data suggest that economic activity has stabilized to some degree, with services recovering and digital sectors, particularly AI-related services, showing resilience.

Headline inflation eased to 2.8% in June, but the ECB expects the recent energy shock to keep inflation above its 2% target into the first half of 2027. Inflation is expected to moderate later as energy prices normalize. Policymakers continue to see limited evidence that higher energy costs are spreading broadly into wages and prices, while wage growth continues to slow, easing concerns about persistent domestic inflation. Financing conditions have tightened slightly since the ECB's June meeting.

Lagarde's main message was that there is no preset path for September. The ECB is not offering forward guidance and will review a substantial amount of new economic data before its September meeting. Lagarde repeatedly stressed that "the burden of proof is on the data." For currency markets, that keeps each major inflation, wage and activity release important because expectations for relative interest rates are a key driver of EUR/USD.

The ECB is also watching for second-round effects from higher energy prices. The central bank is monitoring whether energy costs begin feeding into wages and broader inflation, but it does not currently see meaningful second-round effects emerging. Energy remains the largest risk cited by policymakers, as higher prices lasting longer than expected could weigh on growth while also pushing inflation higher.

Geopolitical uncertainty remains elevated. Conflicts involving the Middle East and Ukraine continue to cloud the outlook. Lagarde acknowledged recent Houthi threats but said they were not incorporated into today's policy decision. Asked about her own future, Lagarde quipped that "this captain is staying on the ship," indicating that she does not intend to step down.

The ECB remains in wait-and-see mode. Although today's decision was unanimous, Lagarde acknowledged that some policymakers discussed whether another rate increase should be considered. For now, the Governing Council believes inflation remains manageable without additional tightening, provided energy-driven price pressures do not spread more widely through the economy. That leaves incoming inflation, wage and energy data between now and the September meeting as the main factors likely to determine the ECB's next move.

Sources said ECB officials are ready to raise rates in September.

The ECB's messaging, particularly the final source comments, shifts attention back toward policymakers favoring tighter policy and raises an important question: is the central bank moving into a tighten-skip-tighten pattern, or will policy truly remain meeting by meeting? With oil prices elevated and inflation risks rising again, the backdrop makes another rate increase easier to justify.

That leads to the next fundamental question for traders: does additional ECB tightening ultimately support the euro, or does it slow growth enough to become negative for the currency? History suggests the answer is not always straightforward. Higher policy rates can support a currency by improving its yield appeal, but they can also become a drag if investors focus more on weaker growth, tighter credit conditions or safer alternatives.

For now, the market reaction has leaned bearish for EUR/USD. The pair traded lower both before and after the ECB decision, supported by broad-based U.S. dollar buying. Even so, the decline was limited.

Technically, sellers pushed the pair to the edge of a key support level but did not break through it. The June 26 low at 1.13616 held, with today's low reaching 1.13635 before buyers stepped in and sparked a rebound.

That support remains the key line for the pair. If sellers break below 1.13616 and keep the price below that level, attention would shift toward the June low at 1.13238. A sustained move below that level would strengthen the bearish technical case and give sellers greater control.

A break below 1.13616 may appear to be a decisive move off the edge, but technically it would mark the beginning of the next leg lower. More importantly, it would push EUR/USD off the plateau that has contained the downside since June 26 and open the way toward the next technical targets.

If support holds, traders will look for the price to move back above 1.13775 and remain there as it works toward the middle of the 1.1362 to 1.1482 trading range.