ECB Hike Strengthens Euro, May Keep Fed Restrictive

The European Central Bank raised its deposit rate by 25 basis points to 2.25% on June 11 after eurozone inflation climbed to 3.2%. The Governing Council pointed to higher energy costs linked to tensions in the Middle East and indicated at least one more rate increase is likely this year, with September named as the most probable timing.

Markets pushed the euro higher after the ECB decision. When European interest rates rise relative to U.S. rates, capital flows toward euro assets, strengthening the euro and putting downward pressure on the dollar. A weaker dollar raises the dollar price of imports, a channel that can add to U.S. consumer price measures while U.S. headline inflation stands at 4.2%.

The Federal Reserve has held its policy rate at 3.50–3.75% through three meetings this year. Futures markets assign roughly a 97% probability that the Fed will keep rates unchanged at its June 17–18 meeting. That outlook could change if a stronger euro translates into measurable import-price inflation or if U.S. producer prices, jobless claims and other data released before the meeting point to persistent price pressure.

Kevin Warsh will chair his first Federal Open Market Committee meeting on June 17–18 after pledging a “regime change” on inflation discipline. Investors will focus on his post-meeting comments for indications of whether the Fed intends to hold policy restrictive.

Major banks have revised their Fed cut forecasts. Goldman Sachs moved expected rate cuts into late 2026 or early 2027, citing energy-cost pass-through that could keep U.S. core inflation near 3% for the remainder of the year. Cleveland Fed President Beth Hammack warned that waiting for “definitive evidence” that inflation is contained may require “larger policy adjustments, at greater cost.”

Financial markets have adjusted to the repricing of rate expectations. Bitcoin declined from about $82,000 in mid-May to the low $60,000s as investors reduced the odds of near-term easing. Traders and economists say upcoming U.S. data releases and Warsh’s communications will be key to assessing whether central banks keep policy tight into the second half of the year.

Background: The ECB’s June rate increase is its first since 2023 and follows months of inflation above the bank’s 2% target. The euro’s recent appreciation reflects a global repricing of interest-rate expectations, and economists note energy-driven inflation is affecting major economies, complicating the timing and size of future central bank actions on both sides of the Atlantic.