Euro: Under pressure from cautious ECB outlook – Commerzbank

Falling headline inflation and concerns about France’s public finances favour a cautious approach next year, according to Commerzbank’s Antje Praefcke. With the European Central Bank (ECB) unlikely to alter rates today, the Euro’s outlook hinges on its guidance on future increases. EUR/USD could edge down towards 1.10 if markets pare back expectations of further ECB tightening.

Euro faces downside risk from ECB caution

"The next major interest rate decision is coming up today. As with the Fed, however, one thing is clear: nothing is going to change today. Just as with the Fed, the ECB’s future course of action is also important."

"Our experts think an interest rate hike in December is a done deal, and the market has largely priced it in, but doubts remain nonetheless. This is likely due to the situation in France - after all, the yield spread between French and German government bonds has widened further. While ECB officials are saying that the debt problem is primarily France’s to solve - presumably to signal that the French government should not simply rely on the ECB as a lifeline but should make efforts to resolve the issue on its own. Nevertheless, every interest rate hike by the ECB naturally also raises yields and thus exacerbates France’s problem of getting its public debt under control due to rising interest payments."

"For this reason, the ECB is likely to exercise caution when it comes to announcing further interest rate hikes next year. Another argument for the ECB to adopt a wait-and-see stance next year is likely to be that overall inflation (due to the base effect) will fall next year. Core inflation, however, will take longer to ease - this is not expected to happen until mid-2027."

"What does this mean for the euro? The market still sees a chance for one more ECB rate hike by mid-next year, and even two by the end of 2027. If it has to revise its expectations downward because the ECB is already sounding cautious today, the euro could weaken even further."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)