The euro fell 0.2% to 1.1593 on Wednesday, retreating from an overnight rebound that stalled just above the 100-day simple moving average at 1.1572. The pair had briefly touched 1.1620 during the Asian session before European trade pushed it lower, leaving the one-and-a-half-week low at 1.1572–1.1575 as the key reference level.
The U.S. Dollar Index rose 0.2% to near 99.60, extending gains as traders priced in a 66.4% probability of a 25-basis-point Federal Reserve rate hike at the September 15–16 FOMC meeting, according to CME FedWatch data. One week ago, the odds were split 39.6% for a hike and 60.4% for a hold.
Eurozone inflation data released before the European open added complexity to the outlook. Flash harmonized inflation (HICP) for August accelerated to 3.3% year-over-year from 2.9% in July, matching consensus, while the monthly rate increased to 0.4% from 0.2%. The headline print remains 130 basis points above the European Central Bank’s 2% target and has accelerated over the past two months.
However, core HICP—excluding food, energy, alcohol and tobacco—eased to 2.4% from 2.5%, below the 2.5% consensus, with the monthly core rate rising just 0.2% after remaining flat in July. The combination of a rising headline driven by energy costs and a cooling core suggests the ECB may hike once in September before pausing, a scenario the market appears to have embraced.
The swaps curve now fully prices a 25-basis-point ECB hike to 2.50% at the September 10 meeting, alongside a total of 60 basis points of tightening over the next twelve months. The Fed funds futures market implies a 67% chance of a 25-basis-point hike on September 16 and 60 basis points of tightening over the same horizon. With both central banks priced for similar tightening paths, the mechanical basis for a sustained EUR/USD rally in 2026 has diminished, leaving the pair confined within a narrow range.
The ECB’s September decision is now largely discounted, reducing the potential for a market reaction unless President Christine Lagarde signals that 2.50% is a terminal level or a waypoint. A hike accompanied by hawkish guidance could lift the euro, while a suggestion that the inflation impulse is transitory could push EUR/USD below the 100-day moving average at 1.1572.
Germany’s inflation trajectory further underscores the policy dilemma. German CPI rose to 2.9% year-over-year in August from 2.8% in July, matching expectations and marking a third consecutive monthly increase. The acceleration aligns with the ECB’s hawkish wing, which has already signaled support for a September hike. ECB Executive Board member Isabel Schnabel had explicitly advocated for another increase ahead of the data release, and the swaps curve had already adjusted accordingly.
Yet the composition of the inflation uptick remains critical. Three consecutive increases driven by energy and administered prices differ from those fueled by services and wages. With eurozone core inflation at 2.4% and falling, the ECB’s room to tighten further is constrained, even as headline inflation remains elevated.
The broader macro backdrop adds to the uncertainty. Eurozone GDP growth slowed to 1.0% in the second quarter, compared with 1.5% in the United States. Tightening into a weaker growth environment—particularly when inflation is driven by imported energy—limits the ECB’s scope for aggressive policy action. Since the ECB’s June 11 hike, the euro has traded below its January high of 1.2016, closing July near 1.1530 and now consolidating around 1.1593.
The market remains divided on the ECB’s next steps. While headline inflation supports a September hike, the cooling core and soft growth outlook suggest the Governing Council may opt for a pause after that move. The risk is asymmetric: if core inflation continues to ease while the headline remains elevated, the ECB could deliver the September hike and then stall, prompting a repricing of the 60-basis-point tightening path priced into the curve.
