Euro: Difficult path for gains against US Dollar – Commerzbank

Commerzbank’s Michael Pfister warns that gaining ground against the US Dollar is a challenging path for the Euro. The European Central Bank’s forthcoming rate hike has already been fully priced into the markets, with forecasts suggesting around 85 basis points more tightening by mid-2027. This leaves little room for the ECB to meet market expectations.

A clearly hawkish surprise might be necessary for the Euro to strengthen, while disappointment could weigh on EUR/USD. The ECB is set to announce its second interest rate rise of the year today, an outcome that is priced in at 100%. The actual decision is likely to have minimal impact on the Euro. Recent oil price increases have fueled anticipation of additional rate hikes, with a total increase of 85 basis points expected by mid-2027.

The high expectations for ECB rate hikes are making it increasingly unlikely that the ECB can meet them. Even if the ECB and its president, Christine Lagarde, wanted to deliver numerous rate hikes, they would wait for developments in the Middle East and future price pressures before committing. For a stronger Euro, the ECB would need a very hawkish stance, while a weaker Euro only requires disappointing market expectations.