Euro Rises as ECB Hawks Offset Firm U.S. Dollar

Written by Sandra Leggero

Sandra Leggero has a background in financial markets, having spent more than 9 years in commodities trading for several European and Asian companies. She holds a degree in Economics from the University of Pavia and specializes in emerging markets.

, | Updated: August 28, 2026

Key Moments

EUR/USD trades near 1.1650 in Asian dealings on Friday after modest prior gains, supported by a hawkish European Central Bank policy outlook.
Markets price close to a 96% probability that the ECB will raise the deposit rate to 2.50% at its September meeting, following comments from Isabel Schnabel.
Stronger U.S. inflation data keep expectations for a Federal Reserve rate hike in December above 70%, capping the upside for EUR/USD.

ECB Hawkishness Lifts Euro

EUR/USD extends its advance after a small uptick in the previous session, trading around 1.1650 during Friday’s Asian session. The currency pair continues to find support from investors’ conviction that the European Central Bank will maintain a firm tightening bias.

ECB Executive Board member Isabel Schnabel recently underscored the need for borrowing costs to continue rising, pointing to the ongoing conflict in the Middle East and a stronger-than-anticipated Eurozone economy as persistent upside risks to inflation. In response to this stance, market pricing has shifted decisively, with the ECB Watch tool indicating nearly a 96% chance of a deposit rate increase to 2.50% at the September policy gathering.

U.S. Inflation Data Caps EUR/USD Upside

Despite the supportive ECB backdrop, gains in EUR/USD are restrained by the resilience of the U.S. Dollar. Stronger-than-forecast U.S. inflation figures released this week have reinforced expectations that the Federal Reserve will lift interest rates before year-end, with the probability of a December move holding above 70%.

By contrast, market positioning for the Fed’s forthcoming September meeting points to a more cautious stance. Current pricing suggests around a 65% likelihood that policymakers will keep rates unchanged at that meeting, signaling a preference for additional data before committing to further tightening.

Policy Event / Indicator	Market-Implied Outcome	Timing Reference
ECB September deposit rate decision	Deposit rate hike to 2.50% seen with nearly 96% probability	Upcoming September ECB meeting
Fed September rate decision	Roughly 65% probability rates remain unchanged	Immediate next Fed meeting
Fed December rate decision	More than 70% probability of a rate hike	December meeting

Focus Turns to Jackson Hole and Fed Communication

Foreign exchange markets are now shifting attention to the annual economic symposium in Jackson Hole, Wyoming. Participants are particularly focused on an upcoming address by Federal Reserve Chairman Kevin Warsh, looking for indications about how U.S. policymakers may steer interest rates and broader monetary conditions.

Collins’ Softer Tone Moderates Dollar Optimism

Comments from Fed’s Collins have taken some of the edge off the Dollar’s recent strength. The FXS Speechtracker score for the latest remarks stood at 4.8/10, below the usual baseline of 5.7/10, signaling a dial-back in policy intensity relative to prior comments. The view that existing restrictive policy should still foster “gradual disinflation,” alongside the argument that portfolio management fees distorted headline inflation while market-based prices are closer to target, portrays the latest inflation data as a temporary disturbance rather than a structural shift.

By emphasizing that higher bond yields are compatible with price stability and that, barring new tariff or oil shocks, inflation is expected to soften, Collins tilts toward patience instead of signaling imminent additional tightening. This stance curbs the immediate upside for the Dollar.

The shift in tone is also reflected in broader sentiment metrics. The FXS Fed Sentiment Index declined 2.44 points to 129.11, suggesting a modest retreat in perceived hawkishness following the speech. Even with this pullback, the index remains well above the neutral 100 level, highlighting that overall Fed communication is still hawkish, though Collins’ comments have nudged both the Dollar and risk sentiment away from the most aggressive policy expectations.

Understanding the Euro and Its Key Drivers

What is the Euro?

The Euro is the common currency used by 20 European Union member states that form the Eurozone. It is described as the second most heavily traded currency globally after the U.S. Dollar. In 2022, it reportedly accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion.

EUR/USD is characterized as the world’s most actively traded currency pair, representing an estimated 30% of all transactions. Other notable Euro pairs include EUR/JPY at 4%, EUR/GBP at 3%, and EUR/AUD at 2%.