ECB preview: MUFG sees October hold, two hikes ahead. See EUR/USD year end at 1.12
At a Glance
The desk believes that the ECB will maintain its current interest rates through October, though a December hike is anticipated. Supporting this view is MUFG's analysis indicating that the French-German 10-year spread is projected to stabilize near 170 basis points under normal conditions, while the heightened spread above 200 basis points would signal more drastic fiscal risks reminiscent of the euro zone debt crisis. Per the full note , this dynamic suggests that EUR/USD is poised to stay within a 1.08 to 1.14 range, contingent on ECB communications and external factors such as energy prices.
Key Takeaways
- 01The ECB is expected to hold rates in October, with a potential hike in December.
- 02The French-German 10-year spread is a critical indicator, projected at around 170 basis points.
- 03MUFG anticipates energy prices will influence future rate decisions and EUR/USD dynamics.
- 04Current consensus for EUR/USD stands at 1.16, with a variety of outlooks among market participants.
Full Analysis
What the desk is arguing
The desk maintains that the ECB is unlikely to raise rates in its upcoming meeting due to tightening financial conditions, driven by rising bond yields and increasing French fiscal stress. Per the full note , MUFG sees the current French-German spread stabilizing at around 170 basis points, which aligns with maintaining the policy rate for now.
With EUR/USD closely aligned to the two-year swap spreads, any shifts in ECB expectations could heavily impact the currency. MUFG's projection indicates that higher energy prices and market conditions will weigh on the euro while the broader macroeconomic landscape continues to evolve, justifying a slowly tightening rate path going forward.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.16, with a range observed among firms from 1.12 to 1.20 for December 2026. Notably, rabobank and rb both project 1.17 while mizuho and lloyds target slightly lower at 1.16 and 1.12, respectively.
This perspective contrasts with MUFG's forthcoming rate expectations, as their base case suggests a potential downside for EUR/USD in the near term, given the expected stability in spreads. The desk's view aligns with the lower end of the spectrum, reflecting the ongoing fiscal uncertainties in France that create headwinds for the euro.
How other firms see it
Various firms like nomura and cibc have relatively optimistic positions, forecasting EUR/USD at 1.17 and 1.22 respectively by March 2026, while bofa holds a more guarded stance with a target of 1.04. This divergence highlights a range of outlooks reflecting the macroeconomic uncertainty across Europe.
The trajectory of EUR/USD is also closely related to the performance of the GBP, given the shared pressures from energy prices and central bank policies at play. Traders should remain cognizant of how indicators of economic strength in both regions could shift sentiment in the forex markets.
Market Implications
Watch for any shifts in ECB communication regarding potential policy changes post-meeting, especially signals that could impact the bond market. Additionally, keep an eye on the French-German spread and energy prices which could ultimately dictate the EUR/USD's short-term trajectory.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1600 |
ING | Bullish | 1.1300 |
Société Générale | Bearish | 1.1000 |
From the original
The French-German 10-year spread is the key gauge: MUFG’s scenarios put it at about 170 basis points in its base case and above 200 in a crisis, levels last associated with the euro zone debt crisis. EUR/USD has been tracking the two-year swap spread between the euro and the doll
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