What are the market implications for Will the EUR weaken further heading into next week’s ECB policy meeting??

Traders should watch the EUR/USD level of 1.075, with the ECB meeting set to clarify the policy outlook amid current economic pressures. A sustained close below this level could indicate further weakness for the Euro.

What are the risks to this view on Will the EUR weaken further heading into next week’s ECB policy meeting??

Should energy prices stabilize or if the ECB signals a more hawkish stance in response to inflation, it could reverse the current bearish sentiment towards the Euro.

Will the EUR weaken further heading into next week’s ECB policy meeting?

Q: What's takeaway 1 on Will the EUR weaken further heading into next week’s ECB policy meeting??

The Euro has underperformed among G10 currencies due to rising energy prices and inflation concerns.

Q: What's takeaway 2 on Will the EUR weaken further heading into next week’s ECB policy meeting??

Investor sentiment has worsened, partly due to tensions in the Middle East impacting energy markets.

What the desk is arguing

The desk argues that the Euro is likely to weaken further heading into next week's ECB policy meeting. Investor sentiment has deteriorated significantly, driven by geopolitical tensions and rising energy prices, which are exacerbating the inflation outlook in Europe.

Supporting points include a notable increase in energy prices and bond yield dynamics; specifically, the rise in French bond yields reflects broader uncertainty in the Eurozone markets. This contributes to the narrative that the Eurozone is facing a tougher economic environment, making the Euro less appealing as an investment.

Where it sits in our coverage

While no specific internal consensus targets are available, firms like jpmorgan have a target of 1.10 for the Euro against the US Dollar, while bofa stands at a more pessimistic target of 1.04. This spread indicates divergence in outlook, with the desk's view aligning more closely with the higher end of prevailing forecasts.

How other firms see it

Currently, firms aligned with a bearish Euro stance include jpmorgan, while bofa offers a contradictory view with a lower target. This highlights a growing divide in sentiment among analysts, fueled by different assessments of macroeconomic conditions and ECB response strategies.

The trajectory of EUR/USD is closely linked to central bank actions, particularly as ECB policy decisions loom. The backdrop of rising inflation and geopolitical risks means the path of EUR/USD remains uncertain.

Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst. It's Friday 23rd October 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Abdul Ahad Lockhart, Currency Analyst. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee.

Hi Abdul Ahad. So the Euro has continued to underperform in the FX market over the past week. What have been the main drivers of FX performance?

Yeah, like you say, if we look at Euro performance this week, it's been the worst performer amongst the G10 currencies. And to us, this reflects kind of two main drivers, really. One is the continued move higher in energy prices.

Over the last couple of days, we've had reports out of the US suggesting that the US and Israel is considering plans to potentially strike Iran again after the midterm election. So that's putting renewed upward pressure on energy prices. And we've seen here in Europe in particular, if you look at the price of natural gas, that has risen sharply over the past month, I think up about 30 percent.

And that's definitely adding to those inflation risks in Europe. And from a terms of trade perspective, a bigger and more persistent energy price shock is definitely delivering a bigger terms of trade hit for Europe's economy and that is contributing to a weaker Euro. And then on top of that as well, as we've seen, the sell off in the French government bond market has continued this week, even though we've seen other major bond markets recovering.

If you look at the 10 year French government bond yield, it's jumped above 5 percent now as spreads between French bonds and German bonds have widened out towards the highs that we saw during the Eurozone debt crisis. So it definitely reflects that kind of building concerns over longer term debt sustainability in France and that unwanted tightening of financing conditions in Europe as well is definitely adding to those downside risks for the Euro and that weakness is definitely coming through in particular against the pound and the yen over the past week where we've seen the Euro fall to fresh year to date lows. OK, so there's a heavy schedule of central bank updates in the week ahead.

How could this impact the FX market? Yeah, like you said, we've got a big number of central bank meetings next week. I think probably the main focus, given what's happening in the French bond market, will be the ECB's policy update next week.

We're expecting the ECB to keep rates on hold now. We think the tightening of financing conditions that we've seen in response to the higher bond yields in Europe will make the ECB more cautious about hiking rates further. Admittedly, they're obviously in a very difficult position because, like you said as well at the start, energy prices in Europe are continuing to hit fresh highs.

And if we look at, say, the price of natural gas or oil, they're now at levels which is somewhere between the ECB's kind of adverse scenario and their severe scenario, so consistent with inflation rising above 4% going forward in the Eurozone. So there's definitely still pressure there from an inflation point of view on them to keep hiking rates. But we just think that at this point in time next week, it makes more sense for them to leave rates on hold.

We still think they'll hike by the end of this year in December. But obviously, the risk is that if the situation in France continues to deteriorate, that they may not have to do as much as what's priced into the market in terms of rate hikes going forward. So that's one potential downside risk for the Euro.

I think the market also will be looking to see if there's any tentative signs of indications from the ECB that they may have to make some form of intervention in the bond market, whether to support France or other European countries which have been kind of challenged by the sell-off that we're seeing there recently. We don't think that's imminent in any way, but even an early indication that they would be prepared to step into the market would, I think, be seen negatively for the Euro. And then in terms of the other kind of major central bank updates to watch next week, obviously we have the Fed and the BOJ.

We're expecting both to leave rates on hold next week. But we think compared to the ECB that the BOJ and the Fed could sound relatively more hawkish. It's more a case of leaving rates on hold next week, but still sending a hawkish signal that more tightening needs to be done, both from the Fed and the BOJ.

And we do think the BOJ will reiterate that going forward they'll continue this faster pace of tightening. So we do look for another hike from the Fed and the BOJ before the end of this year. In the FX market, as we've seen over the past week, the yen performance has been driven more by kind of more risk-off trading this week.

We have seen some modest selling in the global equity market, and global bond yields have corrected lower, and that is helping to encourage a stronger yen. So we are kind of watching that as a potential upside risk for the yen going forward if we were to see a deeper correction lower for risk assets. And then finally, we also have the Bank of Canada meeting.

We have seen the biggest kind of change over the past week in terms of market expectations for central bank action from the Bank of Canada. The market now has shifted there to price in a rate hike next week from the Bank of Canada, kind of moving into in line with our own forecast. Previously, the market was more of the view that the Bank of Canada would skip next week's meeting and wait until later this year to start hiking rates.

But we think now with the market almost fully pricing in a hike, it does give the Bank of Canada the opportunity there to start hiking rates. So we do think they'll meet those expectations for a rate hike. And as we've seen this week, that is helping to push down DollarCard, which has just broken back below the 140 level.

So that could continue to drift lower next week unless the Bank of Canada decides that they don't want to start hiking rates as soon as next week. So that's kind of the main things we're watching. I know, Abdullah, as well, you've also been looking at how the FX market has performed when we've seen periods where credit risks are rising for U.S. tech companies.

It'd be interesting to hear your findings. Yeah, thanks, Lee. So we looked specifically at U.S. investment grade technology credit and defined a stress period as one where spreads widened by unusually large amounts over a 20 trading day period.

And more specifically, the move had to be in the top 15 percentiles from all observations since 2022. And the interesting thing about it is that we're actually in one of those periods now. Investment grade technology spreads have widened by about 17 basis points over the past 20 trading days, and that is in the 93 percentile of everything that we've seen since 2022.

So it's a pretty significant move. High yield technology credits have also come under pressure, but that's not what's really included in our signals. But we're deliberately focusing on the investment grades because we want to capture periods when stress is reaching the high quality part of the U.S. technology credit market.

So looking back to 2022, we found 21 separate occasions where investment credit technology credit entered one of these extreme widening regimes. And if we just look at those 21 episodes, there's no particular strong or consistent dollar signal. And intuitively, that makes sense.

Credit spreads widening can be a sign of problem within U.S. assets, which could be negative for the dollar, but it also it can also be part of a more conventional global risk off. The picture becomes a bit more clearer when we bring in U.S. rates into the analysis as a filter. And they have been filtering on those 21 periods.

There have been seven completed episodes where the extreme widening in investment grade technology credit happened alongside falling Treasury yields. So after one week, there wasn't much of a dollar move when you take the averages. But the weakness became clearer as we extended the horizon.

So after three weeks, the DXY was around 0.6% lower on average. And after six weeks, it was around 1.2% lower across all of those seven periods that we looked at. So the currency breakdown is even more interesting when you look at G10 effects.

So after six weeks, those episodes, the dollar was on average 1.5% weaker against the euro and over 2% weaker against the Swiss franc. So the takeaway isn't simply that wider technology credit means wider dollar, it's a bit more specific than that. When higher quality U.S. technology credit deteriorates unusually quickly and Treasury yields are falling at the same time, the historical distribution for the dollar becomes noticeably weaker.

And that's what makes the current environment a bit worth watching. We're seeing one of the more extreme periods of investment grade technology spread widening since 2022, and Treasury yields have also fallen lower. So it's a relatively small historical sample that we're looking at.

So this isn't kind of a mechanical trading signal. But if that combination persists, history suggests that the downside risk of the dollar becomes more meaningful, particularly against the euro and Swiss franc. Great, great insights, Abdullahad.

Thanks, everyone, for listening today. That brings an end to today's podcast and have a good week ahead.

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Will the EUR weaken further heading into next week’s ECB policy meeting?

What the desk is arguing

Where it sits in our coverage

How other firms see it

Sources & References

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