Euro Holds Near Two-Week High as Markets Await ECB Rate Decision

The euro held steady near a two-week high on Thursday as foreign exchange markets braced for a key interest rate decision from the European Central Bank (ECB) later in the day. The U.S. dollar was little changed, trading within a narrow band as traders weighed hawkish Federal Reserve expectations against pressure from major European currencies.

ECB Hike Fully Priced In

The euro traded around $1.1670, close to its highest level in over a week. According to the source, currency markets have fully priced in a 25-basis-point interest rate increase by the ECB. This expectation has been solidified by a recent surge in energy prices, with Brent crude oil surpassing $101 per barrel.

The spike in oil costs has intensified inflationary pressures on the energy-importing European economy, shifting market sentiment from a prolonged summer pause to a definitive September rate hike. Investors will now focus on ECB President Christine Lagarde's press conference and updated staff inflation projections for clues on whether this is a one-time adjustment or the start of a broader tightening cycle.

"The focus will be on Lagarde's forward guidance - whether this hike is enough to hedge against the energy shock, or whether further tightening may still be possible," said Daniela Hathorn, Senior Market Analyst at Capital.com.

Dollar Awaits US Inflation Data

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The U.S. Dollar Index, which measures the greenback against a basket of six major currencies, was largely flat at 98.77. The dollar's muted performance comes despite rising expectations for a Fed rate hike at its September 15-16 policy meeting, with swap markets implying a probability of approximately 62%.

Traders are exercising caution ahead of key U.S. inflation reports: the Producer Price Index (PPI) due later Thursday, followed by the crucial Consumer Price Index (CPI) on Friday. The CPI report will be the final major inflation reading before the Fed's decision. The 10-year U.S. Treasury yield provided some support for the dollar, holding around 4.85%.

Yen Consolidates After Rally

In Asia, the Japanese yen paused its recent rally but remained near multi-month highs, with the USD/JPY pair trading at 153.50 after hitting a seven-month peak of 152.89 earlier in the week. The yen's strength has been driven by traders unwinding short-yen carry trades.

Markets are widely anticipating that Bank of Japan Governor Kazuo Ueda will announce a 25-basis-point rate hike on September 18. This expectation is supported by revised second-quarter GDP growth of 1.4% and persistent import-driven inflation.