With a second 25bp hike already fully priced in, MUFG expects the euro and euro-zone rates to trade off the ECB’s guidance rather than the decision itself, leaving Lagarde’s press conference as the real event risk this week. The bar for a hawkish surprise has risen sharply after the summer repricing, which now has markets expecting roughly 75bps of further tightening by mid-2026, so MUFG sees the greater risk skewed toward disappointment if Lagarde does not clearly endorse another hike before year end, a scenario that could weigh modestly on EUR.
Near-term EUR/USD direction is still likely to be driven more by developments on the dollar side, with MUFG’s short-term fundamentals pointing to a level closer to the lower end of the recent 1.1400-1.1800 range. Upcoming German state elections and rising natural gas prices heading into winter round out the list of downside risks to watch beyond this week’s meeting.
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Earlier:
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The rate decision itself is a formality, MUFG says, it’s what Lagarde signals about the next hike that will move the euro.
Summary:
- MUFG expects the ECB to deliver its second 25bp hike since the US-Iran conflict began at this week’s meeting, on September 9-10 in Berlin, hosted by the Deutsche Bundesbank
- The hike is already fully priced in, so MUFG expects EUR and euro-zone rates to react more to updated policy guidance than the decision itself
- Markets now price around 75bps of additional ECB tightening by mid-2026, up from a more dovish outlook earlier in the summer, driven partly by a renewed surge in natural gas prices since the conflict began
- Euro-zone growth accelerated to 0.4% quarter-on-quarter in Q2, with business confidence surveys having fully reversed their post-conflict declines
- MUFG maintains its own forecast for one final hike, taking the policy rate to 3.00% and into restrictive territory, while seeing a higher risk of a third hike if second-round inflation effects emerge
- The bank flags modest downside risk for EUR if Lagarde does not endorse market expectations for a further hike before year end, alongside German state elections and rising winter gas prices as additional risks to watch
MUFG expects the European Central Bank to deliver its second interest rate hike since the start of the US-Iran conflict at this week’s policy meeting, held September 9-10 in Berlin and hosted by the Deutsche Bundesbank. A 25bp increase is already fully priced into markets, meaning the reaction in both the euro and euro-zone rates is likely to hinge on the central bank’s updated guidance rather than the decision itself.
The rates market has moved considerably more hawkish over the summer, MUFG notes, supported by a renewed surge in natural gas prices that have climbed to fresh highs since the conflict began, alongside a euro-zone economy that has proven more resilient than expected. Growth accelerated to 0.4% quarter-on-quarter in the second quarter, and business confidence surveys have fully reversed the declines recorded immediately after the conflict erupted. Markets are now pricing close to 75bps of additional tightening by the middle of next year, a repricing that MUFG says raises the bar considerably for the ECB to deliver a hawkish surprise this week.
That repricing cuts both ways for the euro. MUFG’s own baseline is for one final hike, taking the policy rate to 3.00% and into what ECB Chief Economist Philip Lane has suggested could be restrictive territory, with the bank remaining sceptical that a third hike will follow given limited evidence so far of significant second-round inflation effects. The bigger risk, MUFG argues, is that the ECB falls short of what markets currently expect, and the euro could weaken modestly if President Lagarde does not clearly endorse another hike before year end.
Even so, MUFG sees near-term EUR/USD direction being driven more by developments on the dollar side of the pair than by the ECB itself, with short-term fundamentals pointing to a level closer to the lower end of the recent 1.1400 to 1.1800 range. Beyond this week, the bank flags rising European natural gas prices heading into winter and upcoming German state elections, including a closely watched vote in Saxony-Anhalt, as additional sources of downside risk for the currency.
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Big EU/ECB week ahead:
This article was written by Eamonn Sheridan at investinglive.com.