Markets price a 25bps September hike and over 50bps tightening in 12 months, but below-potential growth may limit Euro gains.
The European Central Bank is expected to hold rates at 2.25% this week following June’s 25bps increase, adopting a data-dependent stance without updated projections. The decision aligns with market expectations after recent CPI indicators slightly undershot forecasts and energy prices lagged assumptions.
Swaps markets fully price a 25bps hike in September and over 50bps of tightening within a year, pushing the policy rate toward the top of the ECB’s estimated neutral range of 1.75%-3.00%. However, with the Eurozone economy operating below potential, tighter policy may stabilize the Euro rather than drive significant appreciation.
The ECB’s meeting-by-meeting approach avoids pre-committing to a rate path, leaving future moves contingent on incoming data. Analysts suggest this cautious tightening could cap downside risks for EUR/USD without fueling a strong rally.