Euro weakens despite ECB rate hike as US PPI comes in hot

• EUR/USD extends its decline as the Euro gains little support from the ECB rate hike.
• The ECB lifts its deposit facility rate to 2.50% and raises its longer-term inflation forecasts.
• US PPI data and rising US Treasury yields help the US Dollar recover.

EUR/USD extends its intraday decline on Thursday as a recovery in the US Dollar (USD) weighs on the Euro (EUR), while the European Central Bank’s (ECB) widely expected rate hike fails to offer support. The Greenback also finds some support from US Producer Price Index (PPI) data, which showed hotter-than-expected annual headline inflation. At the time of writing, the pair trades around 1.1604, down roughly 0.25% on the day.

ECB raised its three key interest rates by 25 basis points, marking its second hike this year and bringing the deposit facility rate to 2.50%. The ECB said, “The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period. Today’s decision underscores the Governing Council’s commitment to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.”

Updated projections show headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. The forecast for 2026 was left unchanged, while those for 2027 and 2028 were revised higher. Inflation excluding food and energy is expected to average 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028.

The central bank warned that inflation risks are tilted to the upside, while risks to economic growth are tilted to the downside. It reiterated that future decisions will depend on incoming data and will be taken meeting by meeting, adding that it is not committing to a particular interest-rate path.

US PPI rose 0.4% MoM in August, matching market expectations and accelerating from the 0.1% increase recorded in July. Annual producer inflation climbed to 5.4%, slightly above the 5.3 forecast and up from 4.8%. Core PPI rose 0.2% MoM in August, below the 0.3% forecast and the previous 0.3% increase. On an annual basis, core producer inflation rose to 4.6% from 4.3%, in line with expectations.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.10 after recovering from an intraday low of 98.71. Rising US Treasury yields offer additional support to the Greenback, with the benchmark 10-year yield climbing to around 4.90%, its highest level since November 2023.

The PPI figures suggest that inflation pressures remain elevated, strengthening the case for a Federal Reserve (Fed) rate hike next week. Elevated Oil prices due to tensions in the Middle East add to these concerns and could make it harder for inflation to return to the Fed’s 2% target. According to the CME FedWatch Tool, traders price in around a 64% probability of a 25-basis-point increase at the September 15-16 meeting.

Attention now turns to Friday’s US Consumer Price Index (CPI) report, which could play a more decisive role in shaping the Fed’s decision.