Euro: Fed rate prospects and ECB credit signals take centre stage - Danske Bank

Danske Bank projects two further Fed rate hikes, in December and March. Its Danske Research Team reports that broad-based Euro weakness across G10 FX drove EUR/USD sharply lower towards year-to-date lows. The bank expects the Fed to leave rates unchanged while reaffirming its commitment to bringing inflation back to target. ECB lending figures indicate that the Euro area remains able to withstand higher interest rates.

G10 euro weakness as Fed expected to stay hawkish

"There were only modest moves in global rates yesterday, with the OAT-Bund spread widening slightly. In FX, however, we saw more action with EUR/USD trading sharply lower, closing in on year-to-date lows."

"Looking at the full G10 spectrum, yesterday's price action was most likely predominately another reflection of broad-based EUR weakness."

"In the US, the main event of the week is this evening's FOMC rate decision and the following press conference. We expect the Fed to keep policy rates unchanged, in line with consensus, while markets price in a 10% probability of a hike."

"Most central FOMC members have signalled that they can wait until December before hiking again, although a few see more urgency, and we expect 2-3 dissenting votes in favour of a hike. We still see a need for further tightening and expect two more hikes, in December and March."

"In the euro area, the ECB's Q3 Bank Lending Survey showed that banks tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France. This suggests that ECB's tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth. "

"Separate data on credit growth for September showed that momentum has continued to rise and is now at the highest level since 2022, signalling that the euro area economy can handle higher interest rates surprisingly well, although lower loan demand should dampen credit growth going forward."

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