📆Will the ECB hike strengthen the euro?

An interest rate hike of 25 basis points by the European Central Bank at today's meeting is practically a foregone conclusion and fully priced in by the market. Investor attention is shifting to what will happen in the coming months. However, very strong and concrete communication would be needed to stimulate the euro to rise. Even with the current assessment of hikes in the eurozone being stronger than in the US, the EURUSD pair remains under pressure. What is worth paying attention to ahead of today's decision?

• Hawk dominance: The indicator concerning communication from European bankers (the EBCspeak index, a proprietary measure of central bank sentiment from Bloomberg Economics) has reached its highest level in about two and a half years. ECB representatives, such as Schnabel and Kazimir, have made it clear that further policy tightening is inevitable. It is worth emphasizing that the ECB fears a return to the situation of 2022, which is why it will decide on an earlier, preemptive move now
• Core inflation pressure: The hawkish faction in the ECB is strongly supported by the May core inflation reading, which accelerated to 2.5% y/y (from 2.2% in April).
• New projections: The market expects that the updated ECB projections will continue to be based on two rate hikes this year. The main scenario assumes a move in June and another in September, although mounting price pressure may prompt some of the Governing Council to push for a July date. A clear indication of July could lead to another attempt at a recovery in EURUSD
• Economic stagnation in the background: GDP forecasts for the eurozone will likely be revised downward. Data for the first quarter of 2026 brought a negative surprise. Instead of the expected growth of 0.1%, GDP contracted by 0.2%. Furthermore, PMI indicators show a clear deterioration in the economic situation.

Why a hawkish ECB may not help the euro?

Currently, the EURUSD exchange rate is oscillating within the 1.1530 - 1.1550 range. EURUSD could react with a rise if Christine Lagarde sends a strong, clear message that another hike could come in July if the situation in the energy market does not improve. It is worth emphasizing that an interest rate hike may not improve the situation in the eurozone, as inflation at this moment is primarily linked to energy prices and not to an overheated economy. At the same time, a single hike should not completely sink the European economy, although it most likely will not help it. 

Looking at the EURUSD pair currently, we can observe that the pair is well-priced relative to the two-year yield spread, although at the same time, the correlation in the last several months, and in particular the last few, has clearly fallen. 

A significantly greater impact on EURUSD quotations is related to the formation of energy prices. EURUSD is still holding relatively high due to the fact that TTF gas prices have not increased to triple-digit levels. The level of 50 EUR/MWh is high looking at the last 2-3 years, but at the same time much lower than in the catastrophic situation of 2022. 

The correlation between EURUSD and TTF in the short term is quite strong. Currently, it seems that the EURUSD exchange rate may be somewhat undervalued relative to where the price of gas is, but at the same time, gas is relatively expensive looking from the perspective of the last several months. Source: Bloomberg Finance LP, XTB

Key technical levels

If today's ECB communication does not bring absolutely groundbreaking, extremely hawkish declarations (e.g., a hard announcement of a series of aggressive hikes in July and September), the EURUSD pair will likely remain in a sideways trend or head south.

• Key support: 1,1500. In this area, powerful expiring options are accumulated (only by Monday, a total of approximately 8.5 billion euros is rolling there), which act on the exchange rate like a strong magnet. Breaking this level opens the way to the March lows at 1,1411.
• Key resistance: For the euro to regain real, upward momentum, the rate would have to close above the 25-day moving average (55-DMA), which currently converges with resistance at the 1.16 level, which is additionally confirmed by the 61.8 retracement

The hike itself and any potential suggestions regarding another hike this year are not enough. A declaration of a hike in July and an indication of a series of hikes could change the situation for EURUSD. That is why the most important event from the perspective of today's calendar will be Christine Lagarde's statement and the publication of macroeconomic forecasts.