The ECB's Potential Shift to Hiking Cycles in 2026: Implications for European Equities and the EURUSD Pair

The European Central Bank (ECB) has long maintained a cautious stance in 2025, with its monetary policy decisions reflecting a commitment to stabilizing inflation near its 2% target and supporting a modest eurozone growth outlook. As of November 2025, the ECB has not signaled any immediate plans for rate cuts in 2026, with most economists forecasting a continuation of this neutrality through the end of the year and into early 2027. However, recent statements from ECB officials, particularly hawkish policymaker Isabel Schnabel, have introduced uncertainty. Schnabel has warned of upside inflation risks driven by fiscal stimulus, wage pressures, and global supply chain dynamics, suggesting that a rate hike in 2026 cannot be ruled out. This article examines the potential implications of such a shift for European equities and the EURUSD exchange rate, drawing on historical parallels and current market dynamics.

ECB's Policy Outlook: A Delicate Balance

The ECB's latest projections indicate that inflation will average 1.7% in 2026, slightly above its 2% target, while growth is expected to remain modest at around 1.0%. These forecasts, combined with the ECB's "data-dependent" approach, suggest a policy path that prioritizes stability over aggressive intervention. However, the central bank's June 2025 projections highlighted a risk of inflation stabilizing at 2.1% in 2025 before undershooting to 1.7% in 2026. This trajectory, while broadly aligned with the target, leaves room for volatility. If inflationary pressures persist-particularly from domestic fiscal policies or global shocks-the ECB may feel compelled to tighten further.

Historically, the ECB has responded to unexpected inflationary surges with rate hikes, as seen during the 2022-2023 energy crisis. A similar scenario in 2026 could unfold if wage growth accelerates or fiscal stimulus outpaces disinflationary trends. For now, the market has priced in a roughly 30% probability of a rate hike by late 2026, a figure that could rise if inflationary data surprises to the upside.

Implications for European Equities

The impact of ECB rate hikes on European equities is nuanced, shaped by both direct and indirect effects. During the 2022-2023 tightening cycle, European equities faced downward pressure as higher borrowing costs and tighter financial conditions weighed on corporate earnings and investor sentiment. However, the subsequent easing cycle in 2024-2025 saw a recovery, particularly in cyclical sectors like consumer goods and industrials, as growth expectations improved.

A 2026 rate hike would likely reintroduce volatility. Initially, tighter monetary conditions could dampen equity valuations, especially for sectors sensitive to interest rates, such as utilities and real estate. However, a stronger euro-a likely byproduct of ECB tightening-could benefit export-oriented sectors by improving returns for European investors holding U.S. assets. Additionally, the eurozone's improved growth outlook, with real GDP projected to expand at 1.1% in 2026, may provide a counterbalance to rate hike pressures.

EURUSD Dynamics: A Tale of Divergence

The EURUSD exchange rate is poised to react strongly to ECB policy shifts. Historically, ECB tightening cycles have led to a stronger euro, as seen in 2023 when the euro appreciated against the U.S. dollar amid aggressive rate hikes. A 2026 rate hike would likely reinforce this trend, particularly if the U.S. Federal Reserve continues its easing path. Analysts from ING and UBS project EURUSD to rise toward 1.20-1.23 by mid-2026, driven by a weaker dollar and the eurozone's relative resilience.

The euro's strength is also influenced by disinflationary forces. A 10% rise in the euro reduces inflation by approximately 0.6 percentage points over 12 months, a dynamic that could pressure the ECB to reassess its policy stance if inflation drifts below target. However, the ECB's focus on medium-term price stability may override short-term exchange rate concerns, especially if growth remains robust.

Conclusion: Navigating Uncertainty

The ECB's potential shift to a hiking cycle in 2026 hinges on a delicate balance between inflationary risks and growth resilience. While the current consensus favors rate stability, the possibility of a hike cannot be dismissed, particularly if upside inflationary pressures materialize. For investors, this scenario presents both challenges and opportunities. European equities may face near-term volatility but could benefit from a stronger euro and improved macroeconomic fundamentals. Meanwhile, the EURUSD pair is likely to trend higher, reflecting divergent monetary policies between the ECB and the Fed.

As the ECB navigates this complex landscape, a data-dependent approach will remain critical. Investors should monitor inflation data, fiscal developments, and global geopolitical risks to anticipate policy shifts and adjust their portfolios accordingly.