With a hold almost fully priced, the euro’s reaction will turn on whether Lagarde validates December hike expectations or keeps full optionality, and a noncommittal message could see some tightening priced out and weigh on the single currency. The Fed decision a day earlier sets the backdrop for EUR/USD, so a hawkish Fed followed by a cautious ECB would be the most euro-negative combination. Higher oil linked to the Middle East conflict remains the main upside risk to eurozone inflation and to hike pricing. French government bonds are exposed to any sign that the ECB sees the recent rise in yields as a concern rather than welcome tightening, and Friday’s flash inflation and GDP data could quickly reprice December either way.
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Earlier:
- ING sees BOJ holding at 1.25%, two hikes in 2027
- Bank of Canada preview: 81% chance of first hike in a year to 2.50%, economists split
- BOJ preview: Daiwa sees hold, but 2% inflation call could open door to December hike
- Preview: RBNZ set to lift OCR to 3% ahead of election as oil and weak kiwi fuel inflation
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The ECB looks set to take a breather this week, letting higher bond yields do some of its work, while December shapes up as the meeting where the next hike gets decided.
Summary:
- The ECB announces its decision on Thursday and is widely expected to hold the deposit rate at 2.50% after hiking in September
- Morgan Stanley says there is no evidence yet of significant indirect or second-round effects from the energy shock, and that higher long-term yields provide some extra tightening, removing the urgency to hike this week
- The bank sees December, with new data and updated projections, as the more natural moment to change policy; a Reuters poll found 64 of 73 economists expect a December hike
- ING says the French fiscal crisis and higher bond yields are already tightening financial conditions; Commerzbank sees one hike to 2.75% in December, then a plateau through 2027
- Lagarde’s press conference will be watched for signals on further increases
- Friday brings flash Q3 eurozone GDP and October inflation from France, Germany and others; Germany’s Ifo (Monday) and GfK (Wednesday) and the eurozone sentiment surveys (Thursday) are also due
The European Central Bank is widely expected to keep its deposit rate unchanged at 2.50% on Thursday, pausing after September’s rate increase as policymakers weigh an uncertain economic outlook against inflation that is still running well above target.
Morgan Stanley analysts said in a note that there is so far no sign of significant indirect or second-round effects from the latest energy shock on inflation, and that the recent rise in long-term bond yields is already providing a degree of additional tightening. Together, those factors remove any urgency to deliver another hike this week, the bank said, adding that December, when policymakers will have fresh data and updated staff projections, looks like the more natural moment to shift the policy stance.
That view is widely shared. In a Reuters poll conducted earlier this month, 70 of 73 economists expected the ECB to hold in October, while 64 of 73 saw a further 25 basis point increase in December, a sharp reversal from the previous survey, when most thought the tightening cycle was over.
The jump in sovereign bond yields, particularly in France amid concerns over its debt and budget, is likely to be on policymakers’ minds. ING economists argue that the French fiscal crisis and higher yields are already tightening financial conditions, making a hold very likely and pushing any further decision to December. Commerzbank expects the deposit rate to rise to 2.75% in December and then stay there throughout 2027, pointing to an anticipated decline in oil prices and the dampening effect of higher yields as reasons against further moves.
Investors will focus on President Christine Lagarde’s press conference for any signals on the prospect of further rate increases in the coming months. The decision is due at 13:15 GMT (09:15 ET), with the press conference following at 13:45 GMT (09:45 ET).
The data calendar is busy. Germany’s Ifo business survey for October is out on Monday, the GfK consumer confidence survey follows on Wednesday, and eurozone business and consumer surveys are due on Thursday. On Friday, provisional third-quarter eurozone GDP figures will be released alongside flash October inflation data from individual countries, including France and Germany, offering an early read on whether the case for a December hike is strengthening.
This article was written by Eamonn Sheridan at investinglive.com.