EUR/USD was trading near a two-week high around 1.1640 ahead of the European Central Bank’s (ECB) monetary policy decision, with markets widely expecting a 25-basis-point rate increase as policymakers respond to renewed inflation pressure from surging energy prices.

The expected move would raise the ECB’s deposit facility rate from 2.25% to 2.50%, marking the central bank’s second rate hike this year after it resumed tightening in June. Because the increase is largely priced in, the main directional catalyst for EUR/USD is expected to be ECB President Christine Lagarde’s guidance on whether further tightening will be necessary.

Energy shock reshapes the ECB rate outlook

The renewed rise in energy prices has become the main macroeconomic factor behind the ECB’s more hawkish stance. Brent crude has moved back above US$100 per barrel following another escalation in the US-Iran conflict and disruptions to shipping in the Middle East. Eurozone inflation is running above 3%, well above the ECB’s 2% medium-term target.

The combination creates a difficult policy environment. Higher oil and gas prices are lifting inflation while threatening economic growth, leaving policymakers to determine how aggressively to respond to what remains largely a supply-driven inflation shock.

At its July meeting, the ECB left the deposit rate unchanged at 2.25% and said that the full inflationary impact of the energy shock had yet to materialise. It also said it would closely monitor indirect and second-round effects. As a result, the ECB’s communication following today’s decision will be particularly important. Evidence that higher energy costs are spreading to service prices, wages or inflation expectations would strengthen the case for additional rate increases.

Markets assess whether the hike will be the last

The key question for EUR/USD is whether 2.50% will mark the peak of the current ECB rate cycle.

A Reuters poll published last week showed economists broadly expected today’s 25-basis-point increase to 2.50%, while most forecast it would be the final hike in the current cycle. Eurozone growth is expected to remain relatively weak, and wage pressures have moderated, reducing the risk of another sustained wage-price spiral.

However, the balance of risks has shifted toward a more hawkish stance as the conflict in the Middle East has intensified. Deutsche Bank, for example, now expects the ECB to deliver another 25-basis-point hike in December, potentially taking the terminal deposit rate to 2.75%. The bank said persistent energy-related inflation risks could require tighter monetary policy for longer.

The distinction matters for EUR/USD. If Lagarde signals that 2.50% could be the peak, the euro may struggle to extend its recent gains because the expected hike is already heavily discounted. Conversely, language indicating that the Governing Council remains prepared to raise rates again—particularly if energy inflation feeds into underlying prices—would encourage markets to price a higher ECB terminal rate and could provide a positive catalyst for EUR/USD.

ECB-Fed expectations remain central to EUR/USD

EUR/USD will also be influenced by the relative interest-rate outlook for the ECB and the Federal Reserve, rather than by the ECB decision in isolation.

The Federal Reserve currently maintains its policy rate at 3.50%-3.75%. A Reuters poll showed that around 70% of economists expected the Fed to remain on hold at its 15-16 September meeting. However, market pricing has become significantly more hawkish following stronger US economic data and renewed inflation concerns.

The Fed funds futures market was assigning roughly a 62% probability to a Fed rate hike this month. Higher energy prices are also creating upside risks for US inflation (see Fig. 1).

This leaves several possible relative-rate scenarios for EUR/USD. A hawkish ECB combined with stable expectations for the Fed would support the euro pair. By contrast, if the ECB signals that its tightening cycle is nearly finished while expectations for a Fed hike rise, EUR/USD would face downward pressure. If markets price further rate increases from both central banks, the pair is likely to become more sensitive to economic growth and bond-yield differentials.

Tomorrow’s US CPI release could therefore be almost as important for EUR/USD as today’s ECB meeting. Stronger-than-expected US inflation would reinforce expectations for Fed tightening and could widen the US-eurozone yield differential in favour of the US dollar.

EUR/USD moves back above its 200-day moving average

From a short-term technical perspective, covering the next one to three days, EUR/USD’s recent 1.23% corrective decline may have ended. The pair fell from a high of 1.1712 on 21 August 2026 to a low of 1.1566 on 2 September 2026.

Price action has traded back above the rising 20-day moving average since Friday, 4 September 2026, following the US non-farm payroll release. The pair is also moving back above the key 200-day moving average at 1.1623, with the intraday level at 1.1638 at the time of writing (see Fig. 2).

These developments suggest that EUR/USD may be entering a new minor bullish impulsive sequence. The 1.1604 level is the short-term pivotal support for maintaining that structure. A move above near-term resistance at 1.1654 would target intermediate resistance levels at 1.1680 and 1.1710 initially.

A failure to hold above 1.1604, followed by an hourly close below that level, would negate the bullish tone. That could open the way for a choppy minor correction toward the next intermediate support levels at 1.1583 and 1.1560.

Source: MarketPulse

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