Euro faces pressure from cautious ECB outlook – Commerzbank

1.10 is a level EUR/USD could drift towards. Commerzbank’s Antje Praefcke notes that this could happen if markets pare back expectations for further ECB tightening. With the European Central Bank (ECB) unlikely to adjust rates today, its guidance on future increases will be crucial for the Euro. France’s public finances and declining headline inflation support a cautious approach next year.

Euro outlook at 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."

(An editor reviewed this article, which was produced with the assistance of an Artificial Intelligence tool. Learn more.)