ECB Hikes Rates to 2.25% — EUR/USD Climbs to 1.1567
The ECB delivered its first rate hike since 2023, lifting rates to 2.25%. EUR/USD bounces to 1.1567 even as a hot 6.5% US PPI keeps the dollar bid.
A hike the market already owned
The European Central Bank lifted its deposit rate 25bp to 2.25% on Thursday — its first hike since September 2023. This isn't a hot-economy tightening; it's a response to the energy shock from the US-Iran war feeding back into inflation. The ECB marked up its 2026 headline inflation call to roughly 3.0%, from 2.6% in March.
Lagarde pre-commits July
With the move near-100% priced, the signal was in the guidance. Lagarde all but booked the next step: "Barring a material change to our baseline, it is very likely the case that we will continue to raise rates in July." Translation for the euro: the terminal rate is still ahead of us.
The dollar's PPI counterpunch
Cutting the other way is a firm dollar. US producer prices jumped 1.1% MoM and 6.5% YoY in May — the hottest since November 2022 — led by a 10.7% energy surge. Core PPI ran 0.4%, just shy of the 0.5% consensus, but the headline keeps the Fed-hike narrative alive and the greenback bid.
EUR/USD: a bounce, not a breakout
Despite the hike, EUR/USD actually slid to a six-week low on Thursday — a clean sell-the-news. Today it's clawing back +0.26% to 1.1567, with Iran de-escalation easing the energy-driven dollar bid and Lagarde's July tee-up underpinning the single currency.
The trade is a tug-of-war: a hawkish ECB against sticky US inflation. Hold 1.15 and the bias stays euro-constructive toward 1.17; lose it and the PPI dollar takes back control. The rate spread, not the headline, calls the next leg.
What desks are watching
The market now prices a clean ECB path: after 2.25% in June, July looks all but locked, pushing the deposit rate toward 2.50%. That narrows the spread to a Fed kept on its toes by hot PPI — a standoff that keeps EUR/USD from trending hard in either direction.
Three levels frame the trade: support at 1.1480 (Thursday's six-week low), the 1.1567 pivot, and 1.17 resistance, the hawks' year-end target. Energy is the wildcard: a re-escalation in the Gulf flips the inflation-and-dollar math overnight, and with it the whole rate-spread thesis.