ECB preview: MUFG sees October hold, two hikes ahead. See EUR/USD year end at 1.12
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
If the ECB signals a more aggressive stance on interest rate hikes or if French fiscal concerns escalate beyond current projections, we could see a significant reversal in the euro's strength. An unexpected worsening of energy supply issues might also push the EUR/USD lower, undermining the baseline forecasts.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UBS | Bullish | 1.1600 |
ING | Bullish | 1.1300 |
Société Générale | Bearish | 1.1000 |
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 dollar closely, so any further scaling back of ECB hike expectations is likely to weigh on the currency, while a firm December signal would offer some support. In bonds, heavy redemptions from the ECB’s portfolio in coming months put the pace of quantitative tightening in focus.
Any hint of a slowdown could ease pressure on French debt. Energy remains a swing factor: MUFG’s forecasts assume supply risks fade, so persistently high oil and gas prices tied to the Middle East conflict would challenge both its rate path and its call for a gradual euro recovery. --- Earlier: ECB’s Panetta says rising yields a drag on growth, not a crisis, ahead of rate meeting BoE preview: MUFG expects November rate hike as energy shock pushes UK inflation above 4% --- MUFG expects the ECB to hold next week as higher bond yields and French fiscal stress tighten conditions for it, but still sees two more hikes, with France the biggest risk to the euro. Summary: MUFG says the bond sell-off and French fiscal risks have removed the case for an October ECB rate hike, as officials highlight the drag from tighter financial conditions.
It still expects a 25 basis point hike in December and another in the first quarter of 2027, taking the policy rate to 3.00%, then a cut back to 2.75% by the third quarter of 2027. Resilient activity and higher gas prices since September justify moving into slightly restrictive territory on a risk-management basis, while underlying inflation remains contained. MUFG’s base case, given 45% probability, is continued French fiscal drift, with the deficit at 5.6% to 6.0% of GDP, the French-German spread near 170 basis points, and EUR/USD in a 1.08 to 1.14 range.
In a deeper credibility crisis (15%), it sees the spread above 200 basis points and EUR/USD between 1.02 and 1.10, with the ECB’s TPI potentially in focus. MUFG forecasts EUR/USD at 1.12 by year-end, recovering gradually to 1.18 by the third quarter of 2027. The European Central Bank is set to keep rates on hold at next week’s policy meeting, but MUFG argues the tightening cycle is not over, even as rising bond yields and French fiscal stress do some of the work for policymakers.
In its October European outlook, MUFG said the bond market sell-off and growing fiscal risks in France have taken an October rate hike off the table. ECB officials have increasingly pointed to the impact of tighter financial conditions on the outlook, and underlying inflation pressures remain contained. Even so, the bank’s strategists argue that resilient economic activity and higher gas prices since September still justify a move into slightly restrictive territory as a risk-management measure.
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