ECB set to raise rates for first time since 2023 as euro strengthens against muted dollar

After spending the better part of two years making borrowing cheaper, the European Central Bank is about to pump the brakes. The ECB’s June 11 policy meeting is widely expected to deliver a 25 basis point rate hike, lifting the deposit facility rate from 2.00% to 2.25%.

It would be the first rate increase since 2023. And the euro is already responding, firming up against a dollar that, for once, looks content to sit quietly in the corner.

Why the ECB is shifting gears

Eurozone inflation accelerated above 3% in May, driven in large part by soaring energy prices tied to the ongoing conflict in Iran and the broader Middle East. ECB staff have revised their headline inflation projection for 2026 upward to 2.6%.

This reversal is particularly notable given how aggressively the ECB had been cutting. The central bank slashed its deposit rate by a cumulative 200 basis points since mid-2025, bringing it down to the current 2.00% level. The main refinancing operations rate currently sits at 2.15%, with the marginal lending facility at 2.40%.

Over 90% of economists polled by Reuters anticipate the June hike. Market pricing tells the same story, with futures indicating nearly 100% probability of the move.

The euro’s quiet rally and the dollar’s muted response

Currency markets rarely wait for the actual announcement. Traders have been repositioning ahead of the decision, pushing the euro higher against the US dollar. The logic is straightforward: higher rates in the eurozone make euro-denominated assets more attractive relative to dollar assets, especially when the Federal Reserve isn’t signaling any moves of its own.

There’s already speculation about a follow-up increase in September, though the ECB has been careful to frame its approach as data-dependent, with no explicit commitment to a predetermined course of action.

What this means for investors and risk assets

Rising rates in Europe have a cascading effect across asset classes. Higher borrowing costs make debt more expensive for companies, which tends to compress margins and reduce earnings expectations. That’s not great for European equities, particularly in rate-sensitive sectors like real estate and utilities.

For fixed income investors, the shift creates an interesting dynamic. Short-duration European bonds become more attractive as yields climb, but longer-dated debt could face selling pressure if markets begin pricing in a sustained tightening cycle.

For crypto investors, the direct impact is murkier. ECB rate decisions historically carry less weight in digital asset markets than Federal Reserve actions, largely because the dollar remains the world’s reserve currency and the primary denomination for most crypto trading pairs.

The broader concern is what the rate hike signals about the global macro environment. Energy-driven inflation is notoriously sticky. If Middle East tensions continue to push energy prices higher, the ECB may find itself caught between fighting inflation and protecting an economy projected to grow just 0.9% in 2026.

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