ECB Rate Hike Almost Certain Thursday, Terminal Rate in Doubt

Markets are near-unanimous in expecting the European Central Bank to raise rates at Thursday's meeting, but consensus breaks down sharply when it comes to the terminal rate for this cycle. Bond traders remain split on how much further tightening the ECB can justify.

Much of that uncertainty is now tied to the unfolding Middle East conflict and its direct impact on energy prices and eurozone inflation expectations. A sustained rise in oil costs, highlighted by Brent's move above $100, complicates the ECB's disinflation narrative just as it approaches a policy inflection point.

For euro traders, the divergence between hike expectations and terminal-rate uncertainty is likely to keep EUR volatility elevated into and beyond the announcement, with forward guidance carrying outsized weight this cycle.