Markets are positioned for an ECB rate rise on Thursday, leaving the euro’s direction to be driven by the Governing Council’s guidance on subsequent moves and how it frames growth risks for EUR/USD. The content indicates policymakers are unlikely to commit to a prolonged tightening cycle, which could cap the currency and prompt some moderation in positioning that had been driven by the gap between ECB expectations and those of peers.
The euro is described as trading around the levels assumed in the ECB’s past three Staff Projections, meaning the exchange rate is no longer outrunning the central bank’s 2025 assumptions. It adds that the recent surge in hawkish pricing has failed to support the currency in either its level or its positioning, with the euro still characterised as underheld in iFlow. On that basis, the piece says a modestly weaker EUR would help exporters.
Focus Shifts to Forward Guidance Amid Growth Risks
A 25 basis point hike from the European Central Bank this Thursday is fully priced in, so we are not focused on the decision itself. The key event will be the forward guidance, as we expect concerns about economic growth will prevent the Governing Council from committing to a prolonged tightening cycle. Recent data showing the Eurozone Manufacturing PMI dipping to 49.5 supports this cautious view, giving the central bank a reason to pause.
The Euro is already trading around levels the ECB has previously projected, so the bank is no longer playing catch-up to a strong currency. With May’s headline inflation cooling to 2.1%, the urgency for aggressive action has faded, and a modestly weaker Euro would likely be welcomed to support the export sector. This explains why recent hawkish expectations have failed to provide any meaningful support for the EUR/USD exchange rate.
Trading Implications: Dovish Hike and Options Strategies
For derivative traders, this sets up a classic “dovish hike” scenario, where the currency could weaken even as rates go up. We see value in buying near-term EUR/USD put options to position for a potential slide following the press conference. Given that implied volatility is elevated before the meeting, selling out-of-the-money call spreads could also be an attractive strategy to capitalize on a capped upside.
This environment reminds us of late 2024, when a widely expected rate hike was followed by a currency sell-off on the back of a cautious economic outlook. Furthermore, the latest CFTC data shows that net speculative long positions in the Euro have declined for three consecutive weeks. This indicates that conviction is already low, and the currency has little underlying support to absorb a dovish message from policymakers.
