Euro holds gains above 1.1600 on ECB tightening prospects

The EUR/USD pair trades with mild gains around 1.1625 during the early Asian session on Tuesday. The Euro (EUR) strengthens against the US Dollar (USD) amid expectations of a rate hike from the European Central Bank (ECB). Traders await the US Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data later this week.

The ECB delivered its first hike since 2023 in its June policy meeting to tame surging prices, but then hit pause at its last meeting in July to see how the conflict would develop. The ECB is set to hike its benchmark rate for the second time this year at its policy meeting on Thursday.

"The ECB governing council looks certain to raise its deposit rate from 2.25 percent to 2.5 percent," said Andrew Kenningham, chief Europe economist at Capital Economics.

ECB President Christine Lagarde is expected to give little away at her press conference after the rate call and insist that future decisions will be based on incoming data.

Across the pond, a stronger-than-expected US jobs report showed 162K job additions in August, pushing Federal Reserve (Fed) rate-hike bets above 60%. 

Additionally, ongoing Middle East tensions, including tit-for-tat strikes between the US and Iran on vessels sailing in the Strait of Hormuz, could drive flows into safe-haven assets such as the Greenback. 

Iranian Parliament Speaker Mohammad Baqer Qalibaf said on Monday that “Strike our assets and you get struck.” Earlier on Monday, US Defense Secretary Pete Hegseth stated that the US “will destroy (and sink)” Iranian oil tankers if Iran fires on U.S. vessels.

Euro focus turns to ECB as markets eye further tightening signals

Analysts at Deutsche Bank highlight that, in Europe, “the ECB policy decision (Thursday) will be the key event,” with their European economics team expecting “a 25bp rate increase, taking the deposit rate to 2.50%.” They add that investors are likely to concentrate on “any guidance regarding the likelihood of further tightening,” particularly in light of their recently upgraded Euro Area growth projections for 2026 and 2027 and the softer EUR/USD backdrop amid a stronger Dollar and higher US yields.

Technical Analysis: EUR/USD keeps a modest bullish bias above the 100-day SMA

In the daily chart, EUR/USD holds a modest bullish bias as spot remains above the Bollinger middle band, which coincides with the 20-day simple moving average (SMA) and comfortably over the 100-day moving average (MA). This configuration suggests the broader uptrend is still supported, while the Relative Strength Index (RSI) around 56 hints at constructive but not overextended bullish momentum.

On the topside, immediate resistance emerges at the Bollinger upper band near 1.1710, where a break would open the way for a stronger continuation of the advance. On the downside, initial support is provided by the 20-day SMA clustered around 1.1615, followed by the 100-day MA at 1.1560, while a deeper pullback would meet the lower Bollinger band near 1.1525.