MUFG sees ECB hike this week, flags downside risk for euro
The desk anticipates that the European Central Bank (ECB) will execute its second 25bp rate hike this week, but sees a distinct risk to the euro if President Lagarde fails to deliver a clear hawkish signal regarding future policy. Per the full note from MUFG, while a hike is already anticipated by the market, the focus will pivot to Lagarde's press conference, which might influence the euro significantly—specifically, if there is no indication of an additional hike before year-end. MUFG also flags potential downside risks, including rising natural gas prices and upcoming German state elections, that may pressure the EUR/USD closer toward the lower end of the recent trading range of 1.1400 to 1.1800, given a current spot at 1.1446.
What the desk is arguing
The desk expects that the ECB will increase rates by 25bps this week, but warns that any failure by President Lagarde to communicate a clear hawkish stance could lead to downward pressure on the euro. As noted by MUFG, the bar for a hawkish surprise is now higher, with markets adjusting their expectations upwards to nearly 75bps of further tightening by mid-2026.
Current market sentiment has priced in this move quite thoroughly, indicating that the real event risk lies within the messaging from the press conference rather than the rate decision itself. The potential for disappointment is significant if Lagarde does not signal a willingness for additional hikes, positioning the euro to decline modestly if those expectations are unmet.
Where it sits in our coverage
Our consensus for the EUR/USD stands at 1.1700, which is consistent with various firm forecasts, including morganstanley at 1.2000 and rbc at 1.1700 for December 2026. Other firms like ing project a target of 1.1700 for the same timeframe, indicating a slightly unified stance across the board.
However, our desk's bearish slant suggests a more cautious outlook, particularly given the proximity to the lower end of our monitored range, which could be under pressure if the ECB fails to provide a sufficiently aggressive signal this week.
How other firms see it
Several firms, such as rbc and ubs, have forecasts aligning with the potential for further euro upside, particularly if ECB tightening progresses. Conversely, firms like stanchart hold a more conservative view with targets positioned lower; for instance, stanchart sees a target of 1.1400 by March 2026.
The trajectory of the EUR/USD pair is expected to be notably influenced by the direction of U.S. economic indicators as well. With global markets reacting to both sides of the Atlantic, developments in U.S. labor data and CPI reports will be crucial in shaping the cross-currency dynamics as well as guiding expectations around the Fed's own monetary policy stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01MUFG expects a 25bp ECB hike this week but warns of downside risks for the euro.
- 02Focus is on Lagarde's press conference, which could significantly affect EUR/USD.
- 03Current EUR levels suggest a range play around 1.1446 to 1.1800.
- 04Market expectations are leaning toward 75bps of ECB tightening by mid-2026.
Market implications
Watch for significant movement in EUR/USD if Lagarde's outlook deviates from current market pricing. The potential for the euro to test levels closer to 1.1400 hinges on her signaling—or lack thereof—of further hikes beyond this week's decision.
Risks to this view
A lack of clear commitment from Lagarde on future hikes could weigh heavily on the euro, while unexpectedly hawkish comments might provide uplift. Additionally, external pressures such as a downturn in U.S. economic indicators could reverse current positioning in the euro.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
MUFG | Bullish | 1.1800 |
J.P. Morgan | Bearish | 1.1300 |
With a second 25bp hike already fully priced in, MUFG expects the euro and euro-zone rates to trade off the ECB's guidance rather than the decision itself, leaving Lagarde's press conference as the real event risk this week. The bar for a hawkish surprise has risen sharply after the summer repricing, which now has markets expecting roughly 75bps of further tightening by mid-2026, so MUFG sees the greater risk skewed toward disappointment if Lagarde does not clearly endorse another hike before year end, a scenario that could weigh modestly on EUR. Near-term EUR/USD direction is still likely to be driven more by developments on the dollar side, with MUFG's short-term fundamentals pointing to a level closer to the lower end of the recent 1.1400-1.1800 range.
Upcoming German state elections and rising natural gas prices heading into winter round out the list of downside risks to watch beyond this week's meeting. --- Earlier: Eurozone Q2 GDP gets a trade boost as growth accelerates to 0.6% --- The rate decision itself is a formality, MUFG says, it's what Lagarde signals about the next hike that will move the euro. Summary: MUFG expects the ECB to deliver its second 25bp hike since the US-Iran conflict began at this week's meeting, on September 9-10 in Berlin, hosted by the Deutsche Bundesbank The hike is already fully priced in, so MUFG expects EUR and euro-zone rates to react more to updated policy guidance than the decision itself Markets now price around 75bps of additional ECB tightening by mid-2026, up from a more dovish outlook earlier in the summer, driven partly by a renewed surge in natural gas prices since the conflict began Euro-zone growth accelerated to 0.4% quarter-on-quarter in Q2, with business confidence surveys having fully reversed their post-conflict declines MUFG maintains its own forecast for one final hike, taking the policy rate to 3.00% and into restrictive territory, while seeing a higher risk of a third hike if second-round inflation effects emerge The bank flags modest downside risk for EUR if Lagarde does not endorse market expectations for a further hike before year end, alongside German state elections and rising winter gas prices as additional risks to watch MUFG expects the European Central Bank to deliver its second interest rate hike since the start of the US-Iran conflict at this week's policy meeting, held September 9-10 in Berlin and hosted by the Deutsche Bundesbank. A 25bp increase is already fully priced into markets, meaning the reaction in both the euro and euro-zone rates is likely to hinge on the central bank's updated guidance rather than the decision itself.
The rates market has moved considerably more hawkish over the summer, MUFG notes, supported by a renewed surge in natural gas prices that have climbed to fresh highs since the conflict began, alongside a euro-zone economy that has proven more resilient than expected. Growth accelerated to 0.4% quarter-on-quarter in the second quarter, and business confidence surveys have fully reversed the declines recorded immediately after the conflict erupted. Markets are now pricing close to 75bps of additional tightening by the middle of next year, a repricing that MUFG says raises the bar considerably for the ECB to deliver a hawkish surprise this week.
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