The Euro struggled to build on gains after the European Central Bank delivered a widely expected 25bp rate hike, as stronger-than-forecast US inflation data helped offset any support from higher Eurozone interest rates.
With markets already fully pricing the ECB move, attention quickly shifted back to the United States, where another hot inflation report reinforced expectations that the Federal Reserve will keep policy restrictive for longer, leaving EUR/USD little changed near 1.155.
Euro to Dollar (EUR/USD): 1.15191 (-0.15%)
Pound to Dollar (GBP/USD): 1.33398 (-0.17%)
Dollar to Yen (USD/JPY): 160.4985 (-0.02%)
ECB Hikes Rates but Euro Flat as Move Was Priced In
The ECB has started a new hiking cycle.
Whether this is a sustained cycle or ends soon depends on inflation, but growth concerns may also limit further hikes.
EURUSD is flat after US PPI showed an unexpected jump.
Thursday was a busy session for the main markets as the ECB hiked rates, PPI inflation data in the US came in hot, and there was s steady flow of war headlines as US and Iran traded strikes and President Trump threatened to destroy Iran’s oil infrastructure.
Perhaps surprisingly, volatility was on the low side, especially compared to previous sessions this week. Stocks were slightly higher, EURUSD almost completely flat, and oil was higher by only 0.6%.
ECB Starts a New Hiking Cycle
The European Central Bank delivered a 25 basis point rate hike on Thursday, lifting its key deposit facility rate to 2.25%. This marks the first increase since 2023 as policymakers respond to rising inflation driven by energy costs.
The move came as expected, with markets having priced it in in the days and weeks leading up to the announcement. ECB Executive Board member Isabel Schnabel had laid the groundwork in late May, stressing the need for action and noting that even a quick resolution to the conflict would not undo damage already done to energy infrastructure and supply chains.
Projections released with the decision revised the 2026 headline inflation forecast higher, to around 3.0% on average for the year. This marked an increase from the 2.6% outlook in March. The bank expects inflation to stay elevated through much of 2026 before gradually easing back toward the target in 2027 and 2028, assuming energy prices moderate in line with market futures.
Lagarde addressed the shift directly in the lead-up to the meeting. She noted that the March projection of 2.6% for 2026 “will probably be revised,” because the situation had evolved with higher and more persistent energy costs.
Isabel Schnabel went a step further and had warned earlier that inflation was “going to rise further” toward 4% by the end of the year in some scenarios. The bank highlighted upside risks, including potential second-round effects where energy costs feed into wages and broader prices, as well as disruptions to supply chains.
As well as inflation projections, the central bank update growth forecasts, which were trimmed to 0.8% for the year amid signs of a softer economy.
The hike aims to keep inflation expectations anchored, but it also highlights the tricky balance the ECB faces between cooling prices and supporting growth in a region already showing weakness. More hikes are probable, but not certain.
Hot PPI in the US (Again)
Just after the ECB meeting, PPI data was released in the US. This follows on from Wednesday’s CPI data which showed headline inflation rose to a 3-year high of 4.2%.
The headlines from the US Producer Price Index were no better. The index for final demand rose 1.1 % in May, ahead of the roughly 0.7 % consensus estimate. That follows a strong gain in April and marks one of the largest monthly increases in recent years. On a yearly basis, prices advanced 6.5 %, the highest rate since November 2022 and just above the 6.4 % forecast after an upward revision to the prior month.
Energy prices drove much of the jump, with final demand goods up 2.8 % overall. Services rose a more modest 0.3 %. The details point to ongoing pressure from higher oil and gas costs linked to geopolitical tensions in the Middle East. Core measures, which strip out food and energy, showed a more contained 0.4 % monthly rise.
The dollar was firm after the release, but the day’s events have largely cancelled each other out so that EURUSD has stayed flat at around 1.155.
