Inflation forces the ECB to act tougher: the euro may react

On Wednesday morning, September 9, the EUR/USD pair is trading in a narrow range of 1.1620-1.1637 dollars ahead of tomorrow's European Central Bank meeting.

On September 10, the ECB will announce its decision on interest rates, after which the head of the regulator, Christine Lagarde, will hold a press conference. It is the leadership's comments that could be no less important for the market than the decision itself.

Currently, the ECB deposit rate is 2.25%, and the main refinancing rate is 2.40%. According to a Reuters poll, all 65 economists surveyed expect the deposit rate to be raised by 25 basis points to 2.50%.

The reason for the possible policy tightening remains inflation. In August, inflation in the eurozone accelerated to 3.3%, significantly exceeding the ECB's target of 2%. Additional inflationary pressure comes from sharply increased energy prices.

For the euro, a rate hike is a potentially positive factor: higher yields on European assets make the currency more attractive to investors. Therefore, if the ECB not only raises the rate but also signals that it is ready to continue tightening monetary policy, the euro may receive additional support against the dollar.

The rate hike of 0.25 percentage points is already largely priced into market quotations. Therefore, a strong EUR/USD reaction is possible primarily if the ECB's rhetoric turns out to be more "hawkish" than investors expect.

If Lagarde signals that further rate hikes are possible due to persistent inflation risks, this could push the euro higher. Some financial institutions already allow for another rate hike in December amid the continued rise in energy prices.

If the ECB emphasizes that the hike is more of a one-time measure and further tightening could harm the eurozone economy, the euro's reaction may be limited or even negative. Most economists currently expect the ECB to pause after the September rate hike.