EUR/USD: Measured ECB tightening to support Euro – TD Securities

TD Securities' Macro Research team expects the European Central Bank (ECB) to continue a measured tightening cycle, delivering a final 25bp hike in December and taking the deposit rate to 2.75%, which they see as mildly restrictive. They maintain a bullish EUR/USD year-end forecast, arguing that current market pricing overstates future tightening and that policymakers may soon push back against expectations.

TD sees final ECB hike in December

"We expect the ECB to deliver a final 25bp hike in December, taking the deposit rate to 2.75%, as resilient growth and persistent inflation pressures keep policymakers focused on returning rates to mildly restrictive territory."

"We maintain a bullish EURUSD year-end forecast and recently expressed the view via 3m risk reversal to fade the broad-based USD rally."

"OIS markets are currently pricing around 31bp of ECB tightening by end-2026 and close to 100bp cumulatively by end-2027, taking the terminal rate to nearly 3.5%, well above the 2.5% neutral rate referenced by several ECB policymakers."

"Neither we nor the broader consensus expect the ECB, or other major central banks, to validate the full extent of current market pricing."

"In our view, underlying economic data and inflation indicators remain broadly consistent with a measured tightening cycle aimed at moving policy into mildly restrictive territory."

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