During Thursday's Asian trading session, the EUR/USD pair consolidated narrowly near 1.1635. The European Central Bank is set to announce its September policy decision later today, with markets widely anticipating a 25-basis-point rate hike to 2.5%, marking the second increase this year. Meanwhile, the US Producer Price Index for August is scheduled for release later in the day. ING's four-scenario framework, published ahead of the decision, delivers a clear conclusion: regardless of the tone struck in the accompanying statement, the 25-basis-point hike is effectively locked in. The true determinant of the euro's direction lies in the policy guidance Christine Lagarde provides during her press conference.

Rate Hike 'Nearly Certain': Market Focus Shifts from the Decision Itself to Language and Projections

Thursday's rate increase by the ECB has been fully priced in by the market. Driven by ongoing US-Iran tensions pushing energy prices higher, the eurozone's inflation rate rebounded above 3% in August, with swap markets fully pricing in a 25-basis-point hike that would lift the deposit rate from its current 2.25% to 2.5%. A global macro head at a leading institution noted, "September's rate hike looks nearly certain. Inflation remains elevated and should prove sticky over the coming months before gradually easing in the second half of next year." Analysis from strategists at Scotiabank further reinforces this view. The bank points out that the euro's fundamental picture remains supportive, with ECB rate expectations strengthening on the back of the latest surge in oil prices, reflecting "the ECB's heightened sensitivity to energy price risks in the current environment." The bank anticipates a "hawkish hike" on Thursday, with Lagarde set to unveil updated projections and signal ongoing concerns about upside risks, while another 25-basis-point move in December has also been priced in by the markets. The marginal boost to the euro from the hike itself is limited; the real variable is how Lagarde frames the path ahead.

ING's Four-Scenario Framework: From 1.150 to 1.168, Language Determines the Euro's Landing Zone

The scenario framework released by ING ahead of the decision breaks down the market impact into four possible outcomes, each incorporating the 25-basis-point hike but with distinctly different implications for the euro and German 10-year Bund yields. First, the extreme dovish scenario: the ECB hikes while signalling an extended pause and expressing concerns about bond market conditions. This would see EUR/USD approach 1.150, with Bund yields around 3.30%. Second, the dovish hike, ING's base case: inflation forecasts are revised slightly higher, but the overall risk balance remains largely unchanged; growth projections improve while downside risks persist; policymakers push back only mildly on market pricing, keeping all options open. This corresponds to EUR/USD around 1.157 and Bund yields near 3.35%. Third, the neutral scenario: the ECB acknowledges the new upside inflation risks stemming from escalating Middle East tensions, views growth risks as more balanced following improved projections, and signals that further rate increases remain possible in coming months. This would see EUR/USD at approximately 1.163 and yields at 3.40%. Fourth, the most hawkish scenario: the ECB acknowledges that the inflation impact could be larger than initially anticipated, necessitates continued policy action, and substantially upgrades growth forecasts while clearly hinting at additional hikes in October and beyond. This would push EUR/USD toward 1.168 and yields to 3.45%.

The euro and Bund yields currently sit at 1.161 and 3.40% respectively, most closely aligning with ING's neutral scenario. This suggests the market is already pricing in a hike accompanied by firmer language, meaning an outcome landing at either end of the range could trigger larger-than-expected volatility.

US PPI Arrives on the Same Day: Another Key Variable for the Dollar

In contrast to the near-certain ECB rate decision, the direction of US monetary policy remains clouded by greater uncertainty. Thursday's August PPI report represents the first inflation test ahead of Friday's CPI data. Market expectations point to a 5.3% year-on-year increase in headline PPI (up from 4.7%), with core PPI rising 4.6% (up from 4.2%). A stronger-than-expected print would reinforce market bets on a 25-basis-point Fed hike next week, with federal funds futures currently pricing in roughly a 60% probability, potentially providing significant support for the dollar and pressuring the euro. Conversely, a softer reading could solidify expectations that the Fed will hold steady, opening room for further euro appreciation.

Summary

EUR/USD is consolidating narrowly around 1.1635, with the ECB's 25-basis-point hike fully priced in. Market attention has shifted from the rate decision itself to Lagarde's commentary and the updated economic projections. ING's four-scenario framework provides a clear reference: the euro's potential range spans 1.150 to 1.168, while German 10-year yields could fall between 3.30% and 3.45%, with current pricing closest to the neutral scenario. Should the ECB deliver a dovish signal or voice concerns about bond markets, the euro could come under pressure; a clear hint of an October hike, however, could see the single currency challenge 1.168. Meanwhile, the US PPI release serves as another pivotal variable determining the dollar's near-term direction.

As of 10:22 Beijing time, EUR/USD was trading at 1.1637/38.