EUR Money Markets: Tightening as intended
At a Glance
The desk is asserting that the European Central Bank (ECB) may be overestimating the number of rate hikes, given current liquidity conditions and market response. The source notes that while the market pricing anticipates up to four more hikes, the desk disagrees, projecting only one additional hike that would elevate the deposit facility rate to 2.75%. Per the full note , this skepticism arises amid high uncertainty, particularly influenced by geopolitical tensions post-US midterm elections. The consensus target for EUR/USD sits at 1.1700, with forecasts ranging significantly across firms, underscoring the variability of market sentiment. Traders should remain vigilant, as any shifts in market liquidity or ECB policy could spark revaluations.
Key Takeaways
- 01The desk doubts the market's pricing of aggressive ECB rate hikes, favoring a more conservative outlook.
- 02Liquidity conditions are tightening, influencing money-market rates significantly.
- 03Current forecasts show a wide range for EUR/USD, indicating diverging views across firms.
- 04Geopolitical tensions may impact ECB decisions and market expectations moving forward.
Full Analysis
What the desk is arguing
The desk believes the ECB's pricing for rate hikes is overly aggressive and unlikely to materialize as expected. Per the full note , this perspective is informed by a tightening of liquidity conditions and a challenging geopolitical landscape.
Short-term rates are moving upward as the ECB reduces its balance sheet, but the desk anticipates only a single rate increase rather than the multiple hikes that markets are currently pricing in. For instance, potential liquidity pressures from repo markets could lead to sharper rises in money-market rates, but this will have to be managed carefully.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1700, with forecasts ranging from 1.1200 to 1.2000. Specific targets include: - socgen: Dec26 1.1400 - barclays: Dec26 1.2100 - rbc: Dec26 1.2000
This outlook is slightly more conservative than the broader expectation among analysts, as many are projecting higher rates in the short to medium term.
How other firms see it
Analysts at firms like morganstanley and rbc align with a bullish view on EUR/USD, projecting levels of 1.2000 and above. In contrast, danskebank holds a more cautious stance with a target of 1.1100, reflecting a divergence in expectations regarding ECB policy.
The trajectory of EUR/USD is also relevant as it may be influenced by the broader market's reactions to the USD/JPY interactions and ECB policy changes.
Market Implications
Traders should focus on the EUR/USD levels around 1.1700 and be prepared for surprises around liquidity adjustments. Monitoring repo market rates will also be crucial, as they may signal liquidity stress affecting short-term rates.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
From the original
Articles EUR Money Markets: Tightening as intended Published 09:01 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The ECB hike discount is stretched, but hard to lean against given the high level of uncertainty. Liquidity conditions will contin
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