Markets price 93% chance of ECB rate hike on Sept. 10

Markets are pricing a roughly 93% probability that the European Central Bank will raise interest rates by 25 basis points at its September 10 meeting, a move that would lift the deposit rate to 2.50% and mark the second hike of 2026 following June's tightening. The near-certainty of the move underscores a widening divergence between the ECB and both the U.S. Federal Reserve and the Bank of England, reshaping currency markets and pushing EUR/USD toward three-month highs.morningstar+1

Inflation and Geopolitics Drive ECB Hawkishness

The ECB raised all three key rates by 25 basis points in June, bringing the deposit rate to 2.25%. Since then, persistent energy-price pressures tied to the Iran conflict and elevated services inflation have kept policymakers on a tightening path. Bloomberg reported in late July that ECB officials are "prepared to raise borrowing costs in September unless the euro-zone inflation outlook improves markedly". Analysts at Nomura echoed that view this week, stating they "expect the ECB to raise rates in September," adding that recent activity data "may ease concerns from more dovish policymakers".tmgm+2

Eurozone flash PMI data for August showed the manufacturing index climbing to 52.8, its highest since May 2022, while the composite PMI hit a nine-month high of 52.1. That economic resilience has reinforced bets on further tightening even as energy costs remain elevated, with Brent crude above $90 per barrel.finance.biggo

Diverging Rate Paths Reshape FX Markets

The hawkish ECB stance contrasts sharply with the Federal Reserve, which is widely expected to hold rates steady. Fed Chair Kevin Warsh is set to deliver his first Jackson Hole keynote on Friday, with investors seeking guidance on how the central bank will handle stubbornly elevated U.S. inflation without tightening further. The 2-year German-U.S. yield spread has widened by 30 basis points since July, directly fueling the euro's advance.reuters+1

Meanwhile, ING analysts warned this week that the British pound is likely to weaken against the euro as markets price a more dovish path for the Bank of England relative to the ECB. Cooling UK inflation and softer growth have shifted expectations toward earlier BoE rate cuts, further supporting the euro on a cross-rate basis.cryptorank

Near-Term Outlook

EUR/USD briefly topped 1.17 last week before pulling back to around 1.1655 on Tuesday as the dollar found temporary support ahead of this week's U.S. PCE inflation data and the Jackson Hole symposium. Scotiabank strategists noted that "calendar and event risk this week is significant," creating "the potential for some moderate gains in the USD broadly in the short run," though they cautioned that "technical trends remain bearish" for the dollar.fxstreet+1

With the September 10 ECB meeting now just over two weeks away, the rate-differential trade favoring the euro appears firmly entrenched unless incoming data deliver a material downside surprise on eurozone inflation.