- The European Central Bank is expected to hold key interest rates steady on Thursday, following a June hike.
- All eyes will be on ECB President Lagarde’s words amid cooling inflation, weaker growth and a pullback in Oil prices.
- The Euro faces two-way risks heading into the ECB policy announcements.
The European Central Bank (ECB) is expected to hold the interest rate on the main refinancing operations and the deposit facility steady at 2.4% and 2.25%, respectively. The decision will be announced on Thursday at 12:15 GMT.
Unlike in June, the interest rate decision will not be accompanied by the staff’s updated economic projections this time, but will be followed by ECB President Christine Lagarde’s press conference at 12:45 GMT.
The Euro is set to rock on the ECB’s policy announcements, as traders will look for fresh cues on the central bank’s rate hike prospects.
What to expect from the ECB interest rate decision?
At last month's monetary policy meeting, the ECB changed course and hiked rates by 25 basis points (bps) in response to the energy shock triggered by the Middle East war.
Meanwhile, the ECB said in its June meeting Accounts, which were released earlier this month, that "communication should remain neutral, neither suggesting that the current decision was the first of a sequence of hikes to come nor that it was a one-off move.” This suggested that policymakers agreed to keep their options open to respond to different scenarios in the US-Iran conflict.
Since the June meeting, inflation has cooled more than expected, helped by lower energy prices and easing underlying price pressures. The Eurozone’s core Harmonised Index of Consumer Prices (HICP) rose by 0.2% month on month in June, softening from 0.3% in the prior reading.
A brief de-escalation of Middle East tensions pulled Oil prices back to pre-war levels. Easing inflationary concerns could give the ECB some room to pause its rate path and wait for September’s updated staff projections before deciding on a potential hike.
However, natural gas and refined fuel prices remain elevated, while inflation expectations are still projected to stay above the ECB's 2% target through 2027. Additionally, the renewed outbreak of hostilities in the Middle East seen so far this month has revived the Oil price uptrend and inflation fears.
At the same time, the Eurozone economy is losing momentum. Growth is slowing and business activity remains weak amid worsening labor market conditions. The bloc’s economy contracted by 0.2% in the first quarter of 2026, compared with the estimated 0.1% growth expected.
These concerning factors could throw the ECB into a dilemma between supporting growth and containing elevated inflation.
President Lagarde, therefore, could stick to the ECB's meeting-by-meeting and data-dependent approach on Thursday, keeping the door open to another rate hike in September but with a non-committal stance.
How could the ECB meeting impact EUR/USD?
The Euro holds near 1.1400 against the US Dollar (USD) after correcting from the monthly high of 1.1482 hit on July 15 as traders brace for the ECB showdown, with the tone of the meeting likely to matter far more than the rate decision itself.
If Lagarde continues to emphasize upside inflation risks, keeps September rate hike expectations firmly on the table and signals that policy may need to remain restrictive for longer, markets could read this as a hawkish hold decision, providing near-term support to the Euro. That scenario could allow EUR/USD to retest the 1.1600 threshold, particularly if markets rebuild expectations for one final ECB rate hike in September.
Conversely, if the central bank’s president acknowledges slowing growth, softer inflation and a weakening labour market while sounding less confident about further tightening, traders could quickly scale back bets for a September rate hike. That would likely weigh on the Euro, dragging the pair back toward the 1.1350 region.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading EUR/USD following the monetary policy announcement.
“EUR/USD maintains a bearish near-term bias as the pair holds beneath a dense stack of moving averages. The 50-day simple moving average (SMA) at 1.1510 is the first cap, with the 100-day SMA at 1.1578 and the 200-day SMA at 1.1638 reinforcing a broader topside ceiling. The Relative Strength Index (14) sits below the neutral 50 line, hinting at lingering downside pressure rather than an immediate recovery.”
“On the downside, a break of the 1.1350 demand area would leave EUR/USD probing for new support below the 1.1300 round level,” Dhwani adds.
Euro holds firm but ING still sees EUR/USD drifting lower ahead of ECB
In a report published on Wednesday, analysts at ING note that, “barring a near-term move towards another cease-fire between the US and Iran,” their bias “remains for EUR/USD to drift back to 1.1380 and then take its cue from tomorrow's ECB meeting.” However, they caution that, as highlighted in their ECB cheat sheet, “it is hard to see the market pricing in even higher ECB rates, regardless of the language delivered at tomorrow's ECB meeting and press conference,” suggesting limited scope for additional Euro support from policy repricing in the near term.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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