The European Central Bank (ECB) is widely expected to raise interest rates in June, in a decision that could strengthen the euro against both the pound and the US dollar. A hawkish ECB could push GBP/EUR lower and lift EUR/USD, especially if policymakers signal that further rate hikes are likely. But if the bank sounds cautious about tightening monetary policy too quickly, the euro could stumble.
Why is the ECB expected to raise interest rates?
The ECB is expected to raise interest rates for the first time since September 2023, following the energy shock stemming from the US-Iran war. The conflict in the Middle East has triggered an acceleration in inflation, upending bets that central banks around the world would continue cutting rates through 2026.
Eurozone inflation leapt from 1.9% in February – comfortably near the ECB’s 2% target – to 2.6% in March, 3% in April and 3.2% in May. With the effects of higher energy costs still expected to feed through into consumer prices, the European Central Bank may want to raise rates now to keep inflation under control in the long term.
When is the next ECB interest rate decision?
The next ECB decision is due to be announced Thursday 11 June at 13:15 BST. The bank will publish its monetary policy statement alongside the decision, before holding a press conference at 13:45.
How could the ECB decision impact the euro?
The ECB’s interest rate decisions can have a significant impact on the euro, with higher rates generally making the common currency more attractive to investors. If the ECB raises rates and signals that further increases may be needed, the euro could strengthen against both the pound and the US dollar.
However, the scale of any move may depend on the bank's guidance, as a rate hike is already largely priced in. A hawkish tone could support the euro, while a cautious message or greater emphasis on growth risks could limit gains.
ECB decision scenarios for euro exchange rates
ECB decision | Likelihood | Likely euro reaction | Potential impact on GBP/EUR | Potential impact on EUR/USD |
Rate hike with data-dependent guidance | Likely | Moderate euro support | GBP/EUR could edge lower | EUR/USD could rise modestly |
Hawkish rate hike with further hikes signalled | Possible | Euro strengthens | GBP/EUR could fall | EUR/USD could rise |
Rate hike with cautious guidance or focus on growth risks | Possible | Limited euro gains or mixed reaction | GBP/EUR may remain rangebound | EUR/USD gains could fade |
No rate hike despite market expectations | Unlikely | Euro weakens | GBP/EUR could rise | EUR/USD could fall |
What could the ECB decision mean for GBP/EUR?
The pound-to-euro exchange rate could fall if the ECB raises interest rates and signals that further hikes may be needed. A more hawkish ECB would likely support the euro, driving GBP/EUR lower.
The euro has already found support against the pound recently, as ECB policymakers have sounded more willing to tighten policy than officials at the Bank of England (BoE). Speaking at a conference in Reykjavik at the end of May, BoE Governor Andrew Bailey said the bank was open to ‘tolerating temporarily above-target inflation to provide some support for the real economy’.
The ECB’s key deposit rate currently stands at 2%, while the BoE Bank Rate is 3.75%. Although UK rates are higher, BoE policy is already relatively restrictive, which may make policymakers more reluctant to raise rates again unless inflation pressures intensify.
Markets are widely pricing in a 25-basis-point ECB rate hike in June, while BoE expectations look more cautious, with investors pricing some risk of UK rate rises later in the year. This policy divergence could weigh on GBP/EUR.
However, the pound could prove more resilient if the ECB suggests that it may take a more cautious approach following a hike in June. In that case, GBP/EUR losses may be limited.
For a more detailed look at the outlook for the pound, read our GBP forecast for 2026.
What could the ECB decision mean for EUR/USD?
The ECB decision could support EUR/USD if the bank raises interest rates and strikes a hawkish tone. A rate hike, combined with a signal that further increases may be needed, could make the euro more attractive to investors and help the single currency gain ground against the US dollar.
The outlook for EUR/USD will also depend on Federal Reserve expectations, although current market pricing appears more supportive for the euro than the dollar. While investors are pricing a roughly 50% chance of a Fed rate hike by December, according to the CME’s FedWatch, markets are betting that the ECB could raise rates several times this year. If that divergence is reinforced, EUR/USD could move higher.
Friday’s US non-farm payrolls report could still be key. A stronger-than-expected jobs report could support the dollar by increasing bets that the Fed may raise rates later this year. A weaker reading, however, could weigh on the dollar and give EUR/USD more room to rise.
What else could affect the euro?
While the ECB decision will be the main event for the euro, it won’t be the only factor driving the currency. Geopolitical developments in the Middle East could also have a major impact, particularly if they trigger sharp moves in the US dollar.
The euro often has an inverse relationship with the dollar, meaning stronger USD demand can weigh on the single currency, while a weaker dollar can help lift it.
This means the Middle East conflict could either dent or support the euro, depending on how markets react. If tensions escalate, investors may seek safety in the US dollar, which could drag on the euro even if the ECB delivers a rate hike. But if tensions ease and safe-haven demand for the dollar fades, the euro may find it easier to strengthen.
For GBP/EUR in particular, upcoming UK data and the Bank of England’s June decision will also be important. The UK’s April GDP figures are due on Friday 12 June, followed by May inflation data on 17 June, the latest jobs report on 18 June and the BoE interest rate decision later the same day. Softer UK data could pressure the pound, as could the BoE decision if forward guidance remains cautious.
Stay up to date with the latest rate movements
With the ECB decision and ongoing geopolitical uncertainty likely to drive FX volatility, keeping track of the latest market movements can help you plan your international transfers with more confidence.
A free Currencies Direct account gives you access to daily market updates, live exchange rates and rate alerts, with no obligation to make a transfer. You can also speak to your dedicated account manager for guidance on your currency options.
FAQs about the ECB rate decision and its impact on the euro
Will the ECB interest rate decision strengthen the euro?
The euro could strengthen if the ECB raises interest rates and signals that further hikes may follow. However, as a June hike is already priced in, euro gains may be limited, particularly if the bank sounds cautious about growth.
What happens to GBP/EUR if the ECB raises interest rates?
GBP/EUR could fall if an ECB rate hike strengthens the euro against the pound. The move may be larger if markets see the ECB as more likely than the Bank of England to raise rates again.
What happens to EUR/USD if the ECB raises interest rates?
EUR/USD could rise if the ECB delivers a hawkish rate hike and markets price in further tightening. However, dollar strength linked to Fed expectations, US jobs data or safe-haven demand could limit the pair’s upside.
Why does the ECB decision affect exchange rates?
ECB interest rates affect the euro because higher rates can make euro-denominated assets more attractive to investors. Exchange rates also move based on what the central bank signals about future policy.
Could the euro fall even if the ECB raises interest rates?
Yes. With the rate hike already priced in, the euro could fall if the ECB sounds cautious about further tightening, or if the US dollar strengthens sharply on safe-haven demand.
