Euro Holds Firm as Dollar Weakens Before ECB Decision and Rising Oil Prices

The ECB Holds Rates This Week — But What Lagarde Says Next Could Move Markets More Than the Decision

The euro found its footing on Monday as the US dollar softened, offering some brief relief to a currency that has been under sustained pressure since the Iran conflict sent energy markets into convulsions. The stabilisation arrives ahead of what may prove the most consequential week for European monetary policy in over a year, with the ECB set to announce its rate decision on Thursday and a series of data releases — ZEW sentiment, inflation readings, and industrial output figures — arriving in the days preceding it.

The headline decision is not in doubt. The ECB is expected to hold interest rates steady at its March meeting, with ING’s global head of macro Carsten Brzeski noting that “the discussion about further rate cuts has largely come to an end” and that “the risk of inflation undershooting — and any discussion of further rate cuts — should be firmly off the table” by the time the Governing Council gathers on March 19. Morningstar The real question is not what the ECB does on Thursday but what Christine Lagarde signals about where policy goes from here.

Energy Has Changed the Calculation

When the ECB last met in February, eurozone inflation stood at 1.7% — below the bank’s own 2% target — and the dominant discussion was whether a further rate cut might be appropriate to support a still-fragile recovery. Three weeks and a Middle East war later, that conversation has inverted entirely.

Brent crude has risen approximately 54% and benchmark European TTF gas prices have climbed roughly 61% since the US-Israeli strikes on Iran began on February 28. Morningstar Those price movements had not yet fed into February’s inflation print, which nonetheless came in at 1.9% — above forecasts and above January’s reading — gathered before a single bomb fell on Iranian soil. The March reading, when it arrives, will begin to reflect the full impact of the energy spike. Nomura forecasts eurozone HICP at 2.5% year-on-year for March — a 0.6 percentage point upward revision directly attributable to the conflict.

EU energy ministers are convening to discuss emergency measures, including coordinated strategic reserve releases and joint LNG procurement, aimed at cushioning the shock. Lagarde has publicly acknowledged the pressure, pledging the ECB will not allow a repeat of the inflation damage that followed Russia’s Ukraine invasion. “We are in an economic situation that’s different, we are in a better situation and we have a greater capacity to absorb shocks,” she told France 2, adding: “We will do all that is necessary to ensure inflation is under control.” Bloomberg

A Manufacturing Sector Already Under Strain

The energy shock is landing on an industrial base that was already struggling. Eurozone industrial production declined 1.4% month-on-month in December 2025 — the steepest monthly contraction since April 2025 — driven by lower output of capital goods, non-durable consumer goods, and intermediate goods. Germany’s industrial output now sits approximately 9% below its 2021 level. TRADING ECONOMICS

Rising energy input costs threaten to deepen that weakness precisely when Germany’s landmark fiscal stimulus package was expected to begin providing some offset. The combination of higher prices and weaker growth — the stagflationary dynamic policymakers most fear — is not yet the base case, but it is no longer a tail risk either.

Markets Have Already Moved

Financial prediction platform Polymarket now implies a 42% probability of an ECB rate hike in 2026 — up from just 12% before the Iran conflict began. Euronews That repricing reflects the market’s assessment that the ECB’s long pause may be ending — not because the economy is strong enough to absorb tightening, but because energy-driven inflation may leave Frankfurt with no choice.

Thursday’s hold will be unanimous. Thursday’s press conference will not be straightforward. The ECB must signal vigilance without validating aggressive hike expectations, acknowledge inflation risk without abandoning its data-dependent framework, and do all of this against a backdrop of genuine and unresolved geopolitical uncertainty. For the euro, what matters most is not the decision — it is the words that follow it.

FAQs

Will the ECB raise interest rates in March 2026? No — the ECB is expected to hold its deposit rate at 2% for a sixth consecutive meeting. However, the Iran war has made rate hikes a live possibility for later in 2026, with futures markets now pricing one to two 25-basis-point increases through the remainder of the year.

Why is eurozone industrial production falling? Industrial output has been in prolonged structural weakness, with Germany’s production approximately 9% below 2021 levels. High energy costs, weak Chinese demand, and competitive pressure from US industrial subsidies have all weighed on manufacturing. The Iran war threatens to deepen this weakness by raising energy input costs further.