Commerzbank’s Michael Pfister notes that markets fully price today’s ECB rate hike and see around 85 basis points of additional tightening by mid-2027, heavily driven by Oil dynamics. He argues this leaves little room for the ECB to meet expectations, making a clearly hawkish surprise necessary for Euro strength, while any disappointment could weigh on EUR/USD.

High expectations constrain euro upside

“There is little doubt that the ECB will announce its second interest rate rise of the year today. This outcome is priced in at 100%, and almost all of the economists surveyed by Bloomberg (including ours) are expecting it. The actual interest rate decision is thus likely to be of virtually no significance for the euro.”

“The recent rise in oil prices has led to expectations of more than two further interest rate rises by the middle of next year (with a total increase of 85 basis points priced in), with an additional 25 basis points being priced in over the last week alone. As we have often pointed out, expectations of ECB interest rate rises depend heavily on the oil price. But these high expectations are making it increasingly unlikely that the ECB will be able to meet them.”

“Even if the ECB and its president, Christine Lagarde, were intent on delivering so many interest rate rises (which would already be ambitious), officials would certainly not want to commit to this today. Instead, they are likely to wait and see how the situation in the Middle East develops and what further price pressures lie ahead. In short, achieving a positive outcome for the euro is likely to be very difficult.”

“The risks are thus rather asymmetrically distributed today: for a stronger euro, the ECB would have to adopt a very hawkish stance, whereas for a weaker euro, it would only need to disappoint the market’s advanced expectations.”