ECB Rate Hike Expectations Shift as Markets Pivot to Fed Leadership Uncertainty

ECB board member Isabel Schnabel has effectively redrawn the September rate path. According to Bloomberg coverage, her interview made clear that "the current policy rate is insufficient to bring inflation back to target over the medium term," citing the ongoing Middle East conflict, elevated energy prices, and an unexpectedly resilient eurozone economy. Money markets reacted swiftly: pricing for a 25-basis-point ECB hike at the September meeting climbed from roughly 50% to about 75% in the hours that followed.

The ECB's tightening ceiling

What makes the repricing consequential for FX desks is not the September move itself but the implied trajectory beyond it. Schnabel reportedly signaled that policymakers have limited appetite to pre-commit to further hikes once September is behind us. That nuance is critical — it means the euro is now trading against a central bank that has flagged its final tightening step rather than the start of a sustained cycle. EUR/USD's modest gain on August 26, closing at 1.1669 versus 1.1662 the prior day, suggests much of the near-term hawkish move is already absorbed, and that a sustained euro bid will depend more on dollar-side dynamics than on additional ECB headlines.

The US side: sticky PCE meets a divided Fed

Across the Atlantic, the fundamental picture complicates rather than clarifies. The Personal Consumption Expenditures Price Index rose 3.7% year-over-year in July — unchanged from June and slightly above the 3.6% consensus — while core PCE held at 3.3%. The persistence has hardened the inflation backdrop at exactly the moment the Federal Reserve is undergoing a leadership transition. Fed funds futures now reflect a near-even split: just under 60% of traders expect no change in September, while roughly 40% price in a 25-basis-point hike. Layer in the second estimate of Q2 real GDP at 1.5% annualized — sluggish but not contractionary — and the Fed enters Jackson Hole facing a setup where yield differentials could shift meaningfully on either side of the data.

Jackson Hole and the levels to watch

With the Jackson Hole Economic Policy Symposium running August 27–29, Chair Kevin Warsh's first keynote on August 28 now anchors the week. Warsh has so far avoided explicit forward guidance on rates, which leaves the door open for the speech itself to recalibrate capital flows across the dollar complex. We see two-way risk dominating into the event: a hawkish lean from Warsh would reinforce dollar strength against an ECB that is already near its tightening ceiling, compressing euro positioning further, while any dovish tilt could narrow yield differentials and offer the euro a path back toward the 1.1750 region. For now, 1.1600 stands as the immediate downside pivot, with 1.1750–1.1800 as the resistance band likely to define the initial post-Warsh reaction.