EUR/USD is trading in a narrow range during the Asian session on Wednesday, hovering near 1.1580 with a slight intraday decline, as the currency remains confined to the lower band seen since August 20. Market participants are awaiting fresh policy guidance from the European Central Bank, with rate hike expectations serving as the key driver for the euro's near-term trajectory.

ECB Governing Council member Marko Makluf told media that next week's policy decision "will not surprise anyone," noting that markets have nearly fully priced in a September rate hike. He emphasized that policy remains non-restrictive, with rates needing to rise above 2.75% before being considered "broadly restrictive." Makluf stated that if inflation risks escalate significantly, the central bank must be prepared to act; if inflation moves in the wrong direction, the ECB will have to respond accordingly.

September Hike is a Done Deal, But Policy Remains Non-Restrictive

Makluf indicated that next week's policy decision "will not surprise anyone," with markets already pricing in nearly full certainty of a September rate increase. He stressed that the current policy stance is not restrictive, and only when rates climb above 2.75% would they be deemed "broadly restrictive." Most ECB policymakers estimate the neutral rate to be in the 1.75%-2.25% range, meaning a September hike to 2.50% would only push policy into mildly restrictive territory rather than full tightening. Makluf pointed out that if inflation risks tilt significantly to the upside, the central bank must be ready to take further action; if inflation moves in the wrong direction, the ECB will have to follow through with adjustments. Overall, the September hike is viewed as a necessary and anticipated step designed to solidify the disinflation path while avoiding excessive tightening that could unnecessarily harm the economy. Policy will remain data-dependent, with close monitoring of energy prices and wage pass-through effects.

December Path Remains Uncertain, Hinges on Geopolitics and Inflation

Makluf stated that it is currently unclear whether further rate hikes will be needed after next week's increase, emphasizing that the central bank should adhere to a meeting-by-meeting decision-making principle and avoid pre-committing to a policy path. Markets currently price in approximately 47 basis points of tightening by year-end (including the September hike), leaving considerable uncertainty around a potential December move, which will largely depend on developments in the Middle East and inflation data progress. Should energy prices remain elevated or second-round effects begin to materialize, the likelihood of a December hike would rise notably; conversely, if subsequent inflation data stay benign, the central bank may opt for a pause to assess the situation. Makluf also revealed that the ECB may slightly upgrade its growth forecasts in the latest projections, reflecting that economic resilience has been somewhat better than previously assessed. Policy will continue to target a sustainable return of inflation to 2%, responding flexibly to changes in geopolitical and price pressures while maintaining high vigilance and communication transparency.

Institutional Perspectives

Makluf's remarks confirm the September hike, but institutions believe the political uncertainties and energy pressures facing the euro cannot be overlooked. MUFG, in its latest Monthly FX Outlook, argues that the ECB's September hike is nearly fully priced in, with the probability of one more increase before year-end rising, yet political uncertainties—including German state elections and the French election—will continue to weigh on the euro. Changes in Fed policy expectations and de-dollarization concerns have previously supported the euro, but near-term energy prices and growth divergence may limit upside. MUFG expects the euro to strengthen more noticeably starting in Q4, driven mainly by European fiscal stimulus implementation and the gradual narrowing of US-Europe rate differentials.

Deutsche Bank notes that the Fed's earlier restart of its easing cycle had pushed the dollar to annual lows, and although it has stabilized recently, the greenback still faces downward pressure over the medium to long term. The euro, meanwhile, is expected to gain support from European fiscal spending. Deutsche Bank believes that a weakening US labor market and policy uncertainty will continue to weigh on the dollar, with the euro possessing further appreciation potential in the medium term. While short-term volatility may intensify due to energy prices and US-Europe policy divergence, the overall trajectory favors euro strength. Deutsche Bank emphasizes that unless the Fed's independence is seriously questioned, the dollar's strength is unlikely to persist, and the euro should gradually climb toward target levels supported by fiscal and growth improvements.

Summary

Makluf's confirmation makes the September hike a foregone conclusion, with policy still lacking restrictiveness. The December path will hinge on geopolitical and inflation developments, with markets pricing in roughly 47 basis points of tightening by year-end. The euro may continue to consolidate in the 1.1550-1.1650 range in the near term, awaiting fresh direction from next week's ECB meeting. With the September hike fully priced in, the ECB's signals regarding the subsequent path will be the key determining factor for the euro's direction.