ECB's hawkish hold to limit EUR/USD downside to 1.1350, ING says

The European Central Bank's increasingly hawkish posture will cap losses in the euro against the dollar even if policymakers hold rates steady on Thursday, according to ING Groep NV, as cooling inflation and a contracting economy create a policy dilemma for the 25-member bloc.

"The ECB's hawkish hold — keeping rates unchanged while signaling a potential September hike — provides a floor under EUR/USD," said Michiel Tukker, rates strategist at ING Economic and Financial Analysis. "The 2-year EUR inflation swap jumped almost 20 basis points after the renewed Middle East escalation, and markets are now pricing close to a full rate hike by September."

The ECB is expected to keep the deposit facility rate at 2.25% and the main refinancing rate at 2.4% when it announces its decision Thursday at 12:15 GMT, followed by President Christine Lagarde's press conference at 12:45 GMT. The euro traded near $1.1400 Wednesday, holding above the 1.1350 demand zone that ING identifies as key support, after correcting from a monthly high of $1.1482 hit July 15.

The central bank faces a difficult balancing act. Eurozone core inflation cooled to 0.2% month-on-month in June from 0.3%, helped by lower energy prices, while the bloc's economy contracted 0.2% in the first quarter of 2026 against an expected 0.1% expansion. Yet Brent crude has climbed above $90 a barrel amid renewed hostilities in the Middle East, reviving inflation fears and pushing the 10-year Bund yield to around 3.1%.

The June ECB meeting accounts, released earlier this month, showed policymakers agreed communication "should remain neutral, neither suggesting that the current decision was the first of a sequence of hikes to come nor that it was a one-off move." Bundesbank President Joachim Nagel has since said he would not rule out another rate increase, telling reporters the bloc is "back where we started" on inflation.

A hawkish hold — where Lagarde emphasizes upside inflation risks and keeps September rate hike expectations alive — could push EUR/USD toward the 1.1600 threshold, ING said. Conversely, a dovish tone acknowledging slowing growth and softer inflation would likely drag the pair back toward 1.1350, with a break below that level opening the door to sub-1.1300 territory.

The last time the ECB used similarly conditional language was in June 2024, when it cut rates by 25 basis points but stressed a data-dependent approach. The euro weakened 1.8% against the dollar over the following month as markets struggled to price the next move.

ING's analysis suggests the rate differential between the eurozone and the US will remain the primary driver for the single currency. The Federal Reserve's June meeting minutes showed nine officials penciling in higher rates by year-end, with most agreeing "some policy firming would likely be warranted" if inflation stayed elevated due to strong AI-driven demand, high energy prices and tariffs.

"Real rates are now a lot more elevated than a few months ago," Tukker said. "With the Fed on a more hawkish footing and real rates starting out higher, nominal rates can potentially test new highs if the inflation expectations component starts to rise again."

The ECB's next policy meeting after Thursday is scheduled for September 11, when updated staff economic projections will be available.

This article is for informational purposes only and does not constitute investment advice.