ECB Interest Rate Hike Not Enough to Lift Sentiment, Euro Weakens
The euro weakened to near US$1.15 and hovered near its lowest level since early April after the European Central Bank (ECB) raised interest rates by 25 basis points. This increase was in line with market expectations and marked the ECB's first rate hike since 2023.
The ECB took this step as inflationary pressures in the Eurozone resurfaced, primarily due to surging energy costs. The Iran conflict and disruptions to oil shipments through the Strait of Hormuz were key factors heightening inflationary risks, prompting the central bank to tighten policy to keep price expectations under control.
However, the euro remained weak as markets focused on the combination of high inflation and weaker growth prospects. The ECB raised its headline inflation projections to 3.0% for 2026 and 2.3% for 2027, from 2.6% and 2.0% previously. Core inflation projections were also raised to 2.5% for both years.
Meanwhile, growth projections were cut. The ECB now forecasts Eurozone economic growth of 0.8% in 2026 and 1.2% in 2027, lower than its previous estimates of 0.9% and 1.3%, respectively. The combination of higher inflation and lower growth has made investors cautious about the euro's prospects.
The US dollar remains relatively strong as Middle East tensions remain unabated. Repeated military attacks and diplomatic obstacles between the US and Iran have maintained demand for the dollar as a safe haven. This situation limits the EUR/USD's recovery potential, even though the ECB has raised interest rates.
For now, the euro's direction will depend on the tone of the ECB's communication after the rate hike, developments in energy prices, and whether the US-Iran conflict can ease. If energy risks remain high while European growth weakens, the euro could potentially remain on the defensive against the dollar.
Source: newsmaker.id
