Euro: Fed rate outlook and ECB credit signals in focus - Danske Bank

Danske Bank’s Danske Research Team notes that EUR/USD traded sharply lower, nearing year-to-date lows, as broad-based Euro weakness dominated G10 FX. The bank expects the Fed to keep rates unchanged but to reiterate its commitment to returning inflation to target, with two further hikes projected in December and March. ECB lending data suggest the Euro area can still handle higher interest rates.

Euro pressured as Fed seen hawkish

"There were only modest moves in global rates yesterday, with the OAT-Bund spread widening slightly. In FX, however, we saw more action with EUR/USD trading sharply lower, closing in on year-to-date lows."

"Looking at the full G10 spectrum, yesterday's price action was most likely predominately another reflection of broad-based EUR weakness."

"In the US, the main event of the week is this evening's FOMC rate decision and the following press conference. We expect the Fed to keep policy rates unchanged, in line with consensus, while markets price in a 10% probability of a hike."

"Most central FOMC members have signalled that they can wait until December before hiking again, although a few see more urgency, and we expect 2-3 dissenting votes in favour of a hike. We still see a need for further tightening and expect two more hikes, in December and March."

"In the euro area, the ECB's Q3 Bank Lending Survey showed that banks tightened credit standards more than expected, although the net share reporting a tightening remained low from a historical perspective and was mainly driven by banks in France. This suggests that ECB's tightening has so far only led to a modest tightening of credit standards and should not in itself stop the ECB from tightening further as the pass-through remains relatively smooth. "

"Separate data on credit growth for September showed that momentum has continued to rise and is now at the highest level since 2022, signalling that the euro area economy can handle higher interest rates surprisingly well, although lower loan demand should dampen credit growth going forward."

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