The European Central Bank (ECB) is widely expected to deliver a 25 basis point rate hike on Thursday, marking its first increase since September 2023, according to Commerzbank’s Rainer Guntermann and ING’s Chris Turner [1][2]. This move is considered almost certain and is already fully priced into the market, with the ECB deposit rate anticipated to rise to 2.25% [1][2]. Commerzbank does not foresee a back-to-back rate hike in July, viewing such a move as premature, but expects another hike in September [1]. ING concurs that the ECB is likely to maintain a hawkish tone and signal another hike in September, coinciding with a new round of forecasts [2].
Despite the anticipated ECB support, the euro has come under significant pressure against the US dollar, with EUR/USD falling sharply as the dollar surged [2]. ING notes that the 1.14/1.15 region is likely to provide support for EUR/USD this summer, but the pair is expected to remain under pressure as markets test the possibility of a Federal Reserve tightening cycle [2]. Weak German factory orders for April and the risk of deteriorating eurozone manufacturing activity, combined with rising energy prices, are cited as factors contributing to the euro’s vulnerability [2].
Commerzbank highlights that while the ECB hiked rates by 4.5 percentage points during the last cycle, the current environment is different, with long-term inflation expectations still anchored near target, subdued growth prospects, and strained public finances [1]. Looking ahead, Commerzbank expects that lower oil prices will help ease inflation, preventing the ECB from tightening policy into restrictive territory and potentially paving the way for rate cuts in 2025 [1].
No specific market reaction data is provided, but both banks emphasize the importance of the ECB’s communication and the evolving macroeconomic backdrop in shaping market expectations [1][2].
CONCLUSION
The ECB is set to raise rates for the first time since September 2023, but the euro remains under pressure due to broader macroeconomic concerns and a strong US dollar. While another hike is expected in September, analysts see limited scope for further tightening, with the possibility of rate cuts in 2025 if inflation pressures subside. Market participants are closely watching the ECB’s tone and forward guidance for clues on the future policy path.