During Friday's European trading session, the euro traded with a slight downward bias against the dollar, hovering near 1.1645. Danske Bank's research team highlights that investors are reassessing the European Central Bank's policy outlook as fresh inflation data from France and Spain prepares to hit the wires.
The upcoming releases are projected to show the bloc's headline inflation rate climbing from 3.0% to 3.4%, propelled largely by energy costs, while core inflation is likely to hold steady at 2.5%. The ECB's July meeting minutes confirmed that a September rate increase remains the baseline scenario, barring any marked improvement in the inflation landscape.
The euro is holding its ground against the dollar as markets reconsider the ECB's trajectory. With France and Spain set to publish their August inflation figures first, expectations point to a rise in the overall eurozone inflation rate from 3.0% to 3.4%, driven primarily by energy prices, with petrol up roughly 5% month-on-month and diesel climbing about 8%. Core inflation, meanwhile, is anticipated to remain near 2.5%.
The ECB's July minutes affirmed that a September hike is the base case, provided inflation does not show notable improvement, though no explicit guidance was offered for the subsequent policy path. The current uptick in energy costs is directly lifting headline inflation, while relatively stable core readings limit the transmission of demand-side pressures. Traders are weighing the short-term inflation boost from energy against the limited potential for second-round effects, leaving the euro trading in a range as it awaits fresh catalysts and signals from the Jackson Hole symposium to determine its next move.
Danske Bank has updated its ECB forecasts, still anticipating one final 25-basis-point hike in September that would lift the deposit rate to 2.50%. In a notable shift from its previous stance, the bank no longer projects a rate cut in 2027, instead seeing the deposit rate staying at 2.50% through the end of that year. This outlook is grounded in a relatively subdued core inflation environment: current price pressures are largely energy-driven, and evidence of demand-side strain or second-round effects remains scarce, giving the ECB room to adopt a wait-and-see posture after concluding its tightening in September.
Danske suggests that unless core inflation shows a clear acceleration, the central bank will lean toward patience at current levels, observing how energy shocks transmit through the economy and how growth actually performs. This adjustment reflects a market repricing toward the notion that the ECB's policy cycle may peak sooner but stay elevated for a longer duration.
Across the Atlantic, attention is firmly fixed on Federal Reserve Chair Kevin Warsh's keynote address at Jackson Hole. Danske Bank anticipates Warsh will offer minimal forward guidance, maintaining his characteristic communication style and avoiding definitive signals on near-term policy moves. Markets will scour the speech for hints about September's monetary policy, but should Warsh stay relatively quiet and focus on longer-term structural themes, short-term rate pricing will likely hinge more on upcoming economic data than the speech itself.
This event represents a crucial near-term variable for the euro-dollar pair: a hawkish tone from Warsh could bolster the dollar and weigh on the euro, while a dovish lean or a lack of new information would help the euro maintain relative stability. Overall, the actual impact of Jackson Hole will depend on how markets digest a potential "no guidance" outcome, with data releases regaining the upper hand in driving direction thereafter.
In summary, Danske expects the ECB to deliver its final hike in September to 2.50% and then remain on hold for an extended period, with no cuts envisioned until at least 2027. August inflation is expected to show a rise in the headline figure while core stays contained. The market's focus now shifts to Warsh's Jackson Hole address, where Danske predicts minimal forward guidance. In the near term, the euro may trade within a 1.1600-1.1700 range as it awaits fresh catalysts.
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