Despite elevated inflation pressures, European Central Bank expected to leave interest rates unchanged

• 2.50% is the expected unchanged benchmark rate for the European Central Bank. The bank has raised rates twice so far in 2026. 
• With price pressures elevated, ECB President Lagarde is expected to signal more monetary tightening.
• High Oil prices and unease over France leave the Euro exposed to further downside.

2.50% is the widely expected unchanged Deposit Facility rate. The European Central Bank (ECB) is also expected to hold its Main Refinancing Operations (MRO) rate at 2.65%, having increased both rates by 25 basis points (bps) in September. Its two-day monetary policy meeting ends on Thursday, with the decision scheduled for 13:15 GMT.

Although the Monetary Policy Statement will accompany the decision, attention will centre on ECB President Christine Lagarde’s press conference at 13:45 GMT. Markets will scrutinise her remarks to journalists for confirmation of expectations for a third rate increase in December.

An unambiguously hawkish message from the ECB on Thursday would likely offer the Euro (EUR) some support. Nevertheless, downside risks remain pronounced. Elevated Oil prices and investor unease over France’s fiscal position weigh heavily on the single currency. If Lagarde dampens expectations for a December increase, the Euro could take a substantial hit.

2.50% hold expected as ECB weighs further tightening

A pause by the European Central Bank on Thursday is almost fully priced into markets. Following increases in June and September, the latter a quarter-point move, policymakers will want to gauge the effects of the latest rise before lifting borrowing costs again. Intense inflation pressure, however, leaves no room for an accommodative signal.

At 3.8% year-on-year in September, Eurozone consumer inflation reached its highest in three years, accelerating from 3.2% in August. A nearly 19% annual surge in energy prices drove the increase. Oil, the principal source of inflation, trades about 50% above its July lows. Given the uncertainty and volatility in the Middle East, prices are likely to stay elevated for some time. 

Stable core inflation has meanwhile given the ECB some room to manoeuvre. The bank has also rejected evidence of substantial second-round inflation effects, reinforcing the argument for a pause. Even so, the sharp rise in headline inflation must have put policymakers on alert.

France will also feature in Thursday’s ECB committee discussions. Its soaring borrowing costs have triggered alarm across bond markets, widening the spread over the German Bund to levels last seen during the 2009-2011 financial crisis. That has prompted speculation over the ECB’s bond-buying toolkit, specifically the Transmission Protection Instrument (TPI). Activation this week remains a remote prospect.

Balancing these pressures will require carefully calibrated language from ECB President Christine Lagarde. Anchoring inflation is the bank’s primary objective, which will oblige her to signal further rate increases in the months ahead. Yet recent Eurozone figures point to fragile growth. Rising bond yields are already tightening financial conditions, reducing the urgency of an immediate rate rise.

According to analysts at Brown Brothers Harriman, the ECB’s October survey “showed a further net tightening of credit standards and weaker loan demand in Q3,” a mix that “is a headwind to Eurozone economic activity and challenges the nearly 75bps of ECB hikes priced by markets over the next twelve months.”

Futures markets assign more than 80% odds to a quarter-point increase in December. An overly dovish message from Lagarde is therefore the risk, potentially eroding speculative backing for an already weak Euro.

Nearly 5% EUR/USD decline puts ECB signals in focus

Against its major counterparts, the Euro has weakened over recent weeks. Investors have retreated from the single currency in October amid fears over the consequences of Oil remaining above $100 for an extended period. France’s debt difficulties and spreading social unrest have compounded those concerns.

Over the past two months, EUR/USD has fallen nearly 5% to 17-month lows just above 1.1100. Losses over the same period stand at about 2.8% for EUR/GBP and about 6% for EUR/JPY.

Those declines underline why a hawkish stance at Thursday’s ECB meeting matters. Rate expectations alone are unlikely to drive the Euro higher. They could, however, moderate selling pressure, particularly alongside an explicit commitment to support France.

Guillermo Alcalá, FX Analyst at FXStreet, considers the Euro’s bearish cycle overstretched on technical grounds. He nevertheless notes that “the EUR/USD pair’s inability to return to the upper range of the 1.1200s keeps the negative trend fully in play.”

Early indications of fading bearish momentum are visible on the daily chart. While the Moving Average Convergence Divergence (MACD) histogram has moved above zero, the Relative Strength Index (RSI) is still below 40, signalling an absence of bulls.

Alcalá identifies the requirements for a reversal: “Bulls should break the resistance area at 1.1255, which has been holding upside attempts in October, and shift the focus to the late-June lows, near 1.1325 to confirm a trend reversal,” he says.

Without that break, the FXStreet expert expects pressure to intensify towards the year-to-date low of 1.1113. Next comes 1.1095, the 61.8% Fibonacci retracement of the June-August advance, followed by the late May 2025 lows at 1.1050.