Euro: Hawkish ECB fails to lift Euro – Commerzbank

Michael Pfister at Commerzbank notes the European Central Bank (ECB) delivered a second rate hike this year and raised its inflation projections above 2%, which their economists see as pointing to another hike in December. However, EUR/USD has retreated as markets now price almost two further hikes by year-end and an additional 40 basis points by mid-2027, expectations Commerzbank expects will ultimately be disappointed.

Market overpricing future ECB hikes

"The ECB delivered the second interest rate hike of the year yesterday, as widely anticipated. However, the forecasts were slightly higher than expected; notably, the ECB now anticipates that inflation will remain above the 2% target for an extended period. Our economists have interpreted this rather hawkish shift as an indication that another interest rate hike is likely in December."

"Meanwhile, the press conference helped the euro to recover its initial losses following the statement. But this recovery was short-lived, and EUR/USD is now trading lower again. This is likely due in part to a stronger US dollar."

"But it is also partly due to an issue I raised yesterday: the hawkish ECB meeting has caused ECB rate hike expectations to rise further, and the market has now priced in almost two more rate hikes by the end of the year. Consequently, expectations have advanced so much that even hints of an ECB rate hike are not enough to provide stronger support for the euro. Since last week alone, rising oil prices have led to an additional 40 basis points of rate hikes being priced in by the middle of next year."

"We expect these expectations to ultimately be disappointed, which is one of the reasons why, despite the additional rate hike in December, we have not yet revised our EUR/USD forecast upwards."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)