The EUR/USD pair experiences an upward movement, propelled by the hawkish stance of the European Central Bank, which has led to gains in the euro. Market participants are increasingly factoring in a potential deposit rate hike to 2.50% in September. ECB official Schnabel cautions that the conflict in the Middle East, coupled with economic resilience, poses persistent upside risks to inflation. Robust US inflation figures constrain EUR/USD appreciation, maintaining the likelihood of a December Fed rate increase above 70%. EUR/USD edges higher after registering minor gains in the previous day, trading around 1.1650 during the Asian hours on Friday. The pair gains ground, supported by the European Central Bank’s hawkish monetary policy outlook.
ECB Executive Board member Isabel Schnabel recently underscored the necessity for an increase in borrowing costs, pointing to the persistent conflict in the Middle East and the unexpectedly robust Eurozone economy as significant upside risks to inflation. Reflecting this hawkish sentiment, market expectations have shifted significantly, with the ECB Watch tool now pricing in nearly 96% odds of a deposit rate hike to 2.50% at the upcoming September policy meeting. However, further gains for the EUR/USD pair remain constrained due to the ongoing robustness of the US Dollar. Stronger-than-expected US inflation data released this week reinforced expectations that the Federal Reserve will raise interest rates before the end of the year, maintaining a probability above 70% for a December hike. Meanwhile, market pricing for the Fed’s immediate September meeting indicates a preference for patience, with approximately a 65% likelihood that interest rates will remain unchanged.
Meanwhile, forex traders are shifting their attention to the annual economic symposium in Jackson Hole, Wyoming. Market participants are closely observing an impending address by Federal Reserve Chairman Kevin Warsh, seeking potential indications concerning the trajectory of US monetary policy and interest rates. The Fed’s Collins conveyed a somewhat less hawkish stance than is typical, as indicated by the FXS Speechtracker score of 4.8/10, which falls below the established baseline of 5.7/10, suggesting a decrease in policy intensity relative to previous statements. The assertion that the existing restrictive policy ought to yield “gradual disinflation,” coupled with the observation that portfolio management fees have skewed headline inflation while market-based prices align more closely with the target, positions the recent data as a minor fluctuation rather than a fundamental change in the economic regime.
By emphasising that elevated bond yields align with price stability and that, in the absence of new tariff or oil shocks, inflation is expected to moderate, Collins advocates for a patient approach rather than a swift tightening pivot, thereby moderating immediate upward pressure on the Dollar. The FXS Fed Sentiment Index decreased by 2.44 points to 129.11, reflecting a slight reduction in perceived hawkishness subsequent to the speech. Despite the decline, the index remains firmly above the 100 neutral mark, highlighting that Fed communication is still hawkish in aggregate, even as Collins’ softer tone nudges the Dollar and broader risk sentiment away from the most aggressive policy expectations.
