The ECB raised its deposit rate to 2.5% and lifted its inflation and growth outlook, yet EUR/USD found little support as a jump in US producer prices pulled traders' attention toward the Federal Reserve. A US consumer price report due Friday could reinforce that view ahead of next week's FOMC meeting.
The European Central Bank raised its deposit rate from 2.25% to 2.5% and struck a confident tone on the economy. Still, the move did little to help the euro, as gains were overshadowed by accelerating US producer-price growth and a bond-market sell-off.
ECB revises its outlook but signals a pause
The bank also revised its inflation and GDP forecasts slightly upward. This let money markets fully price in an end-of-year rate hike to 2.75%, up from 2.68% previously. Bloomberg notes, however, that the next hike could land in October or December, when forecasts are next updated.
Christine Lagarde's rhetoric was hawkish, shown in the upward revision of long-term rate expectations. But the ECB's emphasis on staying data-dependent was read as reluctance to signal further tightening, suggesting at least a pause while the bank takes stock.
US producer prices revive Fed rate-hike bets
US producer prices fuelled dollar demand instead. The headline PPI rose 0.4% month-on-month, accelerating the annual rate to 5.4%, reversing recent progress on inflation and confirming concerns Kevin Warsh had raised earlier at Jackson Hole. As a result, the probability of a Fed rate rise in September climbed from 60% to 70%. The odds of two rounds of tightening in 2026 rose from 49% to 63%.
A Treasury sell-off adds to dollar strength
The Treasury's buyback also missed its own target: the actual purchase came in at $5.3 billion, below the announced $6 billion, leaving it unable to halt the rally in Treasury yields. Scott Bessent said the debt market remains in good shape, yet yields kept rising, a trend that threatens stock indices and dampens appetite for risk assets.
CPI print is the last hurdle before the Fed meets
US consumer price data, due Friday, is the last key release before the Fed's meeting on 15-16 September. A significant acceleration in headline and core inflation above the forecast 3.4% and 2.4% would cement expectations of a September hike and could further strengthen the US dollar index. After the meeting, markets will turn to the three-to-nine-month rate outlook shaped by the Fed's statement and press conference.
Source: ActionForex
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