The ECB’s hawkish stance did little to help the Euro, as markets focused on the Fed

The ECB’s rate hike and the bank’s confident tone regarding the economy and inflation failed to overshadow the impact of accelerating US producer price growth and the sell-off in government bonds. The US dollar launched a counterattack as expectations regarding the Fed’s rate were reassessed. The ECB’s policy tightening proved a strong headwind for EURUSD. Still, it failed to derail the dollar’s upward trajectory, as markets were more focused on the acceleration in producer prices and the Treasury’s inability to halt the rally in Treasury yields through buybacks. The actual figure came in at $5.3 billion, which is below the announced $6 billion. Despite Scott Bessent’s comments that the debt market is in excellent shape, yields continue to rise, threatening stock indices and dampening appetite for risk assets.

The ECB met expectations by raising the deposit rate from 2.25% to 2.5%. At the same time, inflation and GDP forecasts were revised slightly upwards, allowing money markets to fully price in an end-of-year rate hike to 2.75%, up from 2.68% previously. Bloomberg notes, however, that monetary policy tightening could occur in either October or December, when the forecasts are updated.

Christine Lagarde’s rhetoric can be described as hawkish, as evidenced by the upward revision of long-term rate expectations. However, in the short term, the impact on EUR/USD was overshadowed by inflation figures and the outlook for the Fed’s monetary policy, which the market prefers to price in first and foremost. At the same time, the European Central Bank’s emphasis on being data-dependent was interpreted as a reluctance to signal a continuation of the policy-tightening cycle, which, at the very least, suggested a pause intended to take stock before taking the next step.

US producer price data fuelled demand for the dollar. The headline PPI rose by 0.4% m/m, accelerating the annual rate to 5.4% y/y. The progress made on inflation in recent months has been reversed, confirming the concerns Kevin Warsh expressed earlier at Jackson Hole. The strong reaction to the PPI figures has led to a reassessment, with expectations for the CPI – due out on Friday and set to be the last key release ahead of the FOMC meeting – being revised upwards. As a result, the probability of a Fed rate rise in September has risen from 60% to 70%, whilst the likelihood of two rounds of monetary tightening in 2026 has increased from 49% to 63%.

A significant acceleration in US consumer prices and core inflation, above the forecast 3.4% and 2.4%, respectively, will cement expectations of a rate rise at the FOMC meeting on 15–16 September, creating the potential for further strengthening of the US dollar index. Thereafter, markets will shift their focus to the 3–9-month rate outlook, which the rate statement and the press conference will influence.

Summary: The euro failed to benefit from the ECB’s hawkish stance: markets are reacting more strongly to US inflation and rising expectations of a Fed rate rise.