Markets price in ECB rate hike for September as inflation pressures build

Financial markets are now broadly pricing in a 25 basis point rate increase from the European Central Bank at its September 10 meeting, which would bring the deposit rate to 2.50%. The euro traded in a narrow range on Thursday, held in check by offsetting monetary tightening expectations from both the ECB and the Bank of England.

ECB Tightening Expectations Build

Market pricing points to roughly a 90% probability of a September hike, according to Morningstar, with analysts noting "it's very likely the ECB will raise rates at the next meeting in September to 2.50%." Prediction markets reflect similar odds, with a 90.5% probability assigned to at least two 25 basis point ECB hikes in 2026, encompassing June and September.morningstar+1

Analysts at Danske Bank expect the ECB's publication of minutes from its July meeting, due next week, to "show a bias towards a rate hike in September, which is also fully priced in by markets." The bank said it continues "to expect only one further 25bp rate hike from the ECB."tmgm+1

Fresh data bolstered the tightening case. Germany's Producer Price Index rose 3% year-over-year in July, exceeding expectations of 2.7% and marking the fastest annual increase since April 2023. Meanwhile, the Eurozone's current account surplus widened to €35.1 billion in June from €25.8 billion the prior month, beating forecasts of €22.1 billion, according to ECB data reported by Reuters.fxstreet+1

EUR/GBP Caught Between Two Hawkish Central Banks

The euro held virtually unchanged against the British pound around 0.8580 on Thursday, as rate hike expectations on both sides of the English Channel cancelled each other out. UK Consumer Price Index inflation rose to 2.9% year-over-year in July, while money markets continue to price in a Bank of England rate hike from 3.75% to 4% by year-end.tmgm+1

Danske Bank noted that UK inflation data, "together with yesterday's weak labour market data, the release has taken the top off BoE pricing for the remainder of the year."fxstreet

Outlook Hinges on Energy and Data

Rising European natural gas prices, linked to Middle East supply disruptions, are keeping inflation risks elevated across the Eurozone and strengthening the case for further ECB action. Economists at UBS acknowledged that "German producer prices were higher than consensus" but cautioned that "very few economists bother to forecast this data," suggesting the figures carry limited weight relative to other drivers.tmgm+1

With the ECB's September decision now weeks away, the euro remains supported by tightening expectations but capped by the pound's own hawkish underpinning — leaving EUR/GBP without a clear catalyst to break from its current range.