The European Central Bank is widely expected to raise interest rates by 25 basis points at next Thursday’s meeting, taking the main refinancing rate from 2.15% to 2.40%.
This expectation is not based on speculation but on market pricing. Futures and derivatives markets currently imply a 100% probability of a 25-basis-point increase. Any alternative outcome would represent a significant surprise and likely trigger substantial market volatility.
As recently as late 2025, the ECB remained on an easing path. Inflation was close to target, and discussions largely focused on rate cuts. The escalation of the Middle East conflict changed that outlook rapidly. Rising energy prices forced a reassessment of inflation expectations, prompting a sharp hawkish shift within the Governing Council.
This shift was first signalled in the March meeting minutes and reinforced during the April meeting, when several policymakers indicated they would have supported an immediate rate increase had the option been formally considered. Concerns about repeating the policy mistakes of 2022, when the ECB delayed action until inflation had already exceeded 8%, continue to influence decision-making.
The upcoming 25-basis-point hike is fully priced into markets. Attention has now shifted toward the policy path beyond June. Overnight index swaps currently price approximately 46 basis points of additional tightening through the remainder of 2026. This suggests investors see a meaningful possibility of a second rate hike later this year, although confidence remains limited.
Recent inflation data strengthened the case for tighter monetary policy. The May flash estimate showed Eurozone headline CPI rising to 3.2%, the highest level since September 2023. Core inflation accelerated from 2.2% to 2.5%, exceeding expectations and indicating that inflationary pressures are extending beyond energy prices.
Services inflation increased to 3.5%, while non-energy industrial goods inflation also moved higher. Business surveys conducted throughout April and May showed selling-price expectations reaching their highest levels in years.
At the April press conference, the ECB committed to reassessing policy once the June staff projections became available. While nearly half of all Eurozone inflation components continue to grow below 1%, policymakers remain highly sensitive to the risk of falling behind the inflation curve.
The ECB’s current strategy appears focused on balancing inflation control with the need to avoid additional pressure on an already fragile economy. In more adverse scenarios, Eurozone GDP growth is projected to slow to just 0.7% in 2026.
As a result, policymakers have intentionally kept the possibility of a second rate hike in September open while avoiding any commitment to a broader tightening cycle.
The ECB’s forward guidance may prove more important than the rate decision itself. A message perceived as overly hawkish could encourage markets to price significantly more tightening than policymakers intend, potentially pushing financial conditions higher. Conversely, an excessively dovish tone could undermine the ECB’s inflation-fighting credibility at a time when it remains under close scrutiny.
Technical Analysis
Following last Friday’s stronger-than-expected US Nonfarm Payrolls report, US Treasury yields moved higher, a trend that has continued as oil prices advance. The resulting strength in the US dollar has pushed EURUSD below the 1.1600 level, ending a trading range that had been in place since May 15.
After falling to an intraday low of 1.1506 earlier today, the pair recovered modestly and is currently trading near 1.1530.
The broader technical structure remains intact. Since June 2025, EURUSD has traded within a relatively wide range of approximately 350 to 400 pips, with support around 1.1445 and resistance near 1.1815. Since the beginning of 2026, the pair has established a pattern of lower lows. The rally to 1.2082 in January ultimately proved short-lived and failed to alter the broader range-based structure.
Within the current macroeconomic backdrop, the ongoing bearish move may be approaching exhaustion. A retest of the 1.1430 area remains possible, while a move toward 1.1400 cannot be ruled out, particularly amid the volatility expected around Thursday’s ECB press conference.
Over the medium term, EURUSD is expected to recover. Initial resistance is located near 1.1600, followed by a more significant barrier around 1.1650, where descending trendline resistance is likely to emerge.
Looking further ahead, over the coming weeks and potentially into late summer, EURUSD could eventually return above the 1.1700 level as market focus shifts beyond the immediate policy-tightening cycle.
