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Natural gas markets aside, the main focus for the Euro this week is Thursday's European Central Bank (ECB) decision, where a chunky 75 basis point rate hike is expected.

The move would be a clear signal of intent that policy makers in Frankfurt intend to quickly get on top of inflation expectations before the potential onset of recession in the Eurozone.

"As the markets are not fully pricing 75bp at September’s meeting, such hawkish results could push EUR higher in the short term," says analyst Marek Raczko at Barclays.

Indeed, the long-held rule of thumb in currency markets is that such a hawkish turn in policy at a central bank would be supportive of its currency.

On this basis, if the ECB under-delivers expectations with a 50bp hike, Euro to Dollar exchange rate (EUR/USD) could test new lows again, according to Barclays.

Above: Money market expectations for the size of various central bank hikes in September. The chart shows how central banks have become more hawkish since the Jackson Hole Symposium at the end of August. Image courtesy of Barclays.

Analysts are also mindful that these are certainly not normal times for FX markets, and any uplift for the Euro provided by the central bank's 75bp hike might be fleeting.

"ECB is still not meaningful for the euro," says analyst Meera Chandan at JP Morgan. "Too early to power-up".

The Euro has declined rapidly against the Dollar in 2022 and is now camping below the $1.0 level.

A 20-year low was printed Tuesday at $0.9864 but it is back to $0.9917 at the time of writing, taking dollar payments on euro bank accounts to around $0.9640 and those at payment providers to around $0.9887.

The Euro-Dollar's decline comes amidst a broader Dollar uptrend, encapsulated in Tuesday's all-time high in the Bloomberg Dollar index amidst notable Yen and Euro weakness.

Fighting this trend might therefore not be something the ECB is capable of at a time when investors are more focussed on global growth and energy markets.

Above: Bloomberg's Dollar Index hit an all-time high.

Another short-term risk for the Euro is the tone set by the ECB and the new forecasts they unveil.

"We expect the updated economic forecasts by the Governing Council (likely an upward revision of inflation and downward revision of growth) to keep any EUR bounce capped," says Raczko.

Surging inflation, which reflects the gas price spike, means the ECB is expected to sharply lift their inflation forecast from June's projections of 6.8% for 2022, 3.5% for 2023 and 2.1% for 2024.

Further hikes beyond Thursday are therefore likely and should take the central bank's deposit rate to 1.50% by year-end, according to analysts at Société Générale.

"Support for the single currency if the ECB hikes 75bp this week is likely to be muted," says Kenneth Broux an analyst and strategist at Société Générale, a view which suggests euro bulls might be disappointed with Thursday's outcome.

"We don’t expect euro to be driven by ECB hikes which are inflation motivated and coming despite our baseline of a recession," says JP Morgan's Chandan.

For the Euro, what matters most near-term remains developments in the gas market, say analysts.

"A potential open in NS1 and a squeeze in natural gas prices could also be a catalyst for the EUR to bounce. However, ongoing energy concerns should keep the EUR under pressure in the medium term. If the ECB under-delivers by hiking 50bp, EURUSD could test the lows again," says Raczko.

"The main driver EUR/USD is still expected to be energy dependence and beyond that, the any major rethinks on the US/Fed," adds Chandan.