ECB Hike Expectations Boost Euro Gains

The European Central Bank (ECB) is expected to continue raising interest rates following its recent hike to 2.50%, according to investment bank analysts. The euro could extend gains if energy prices push the ECB to out-hike the Federal Reserve and Bank of England into year-end.

Analysts at MUFG expect two additional 25bp rate hikes in October and December, taking the deposit rate to 3.00% by year-end. Nomura also expects two hikes, but in December and March, while UniCredit, Deutsche Bank, UBS, and ANZ look for one further hike in December.

The ECB's staff projections imply two more hikes, with core inflation remaining above target at 2.3% in the final quarter of 2028. The market now discounts 25 basis point hikes in both October and December, and sees up to two more over the course of 2027.

Nomura keeps its trade idea to buy the euro against the dollar and forecasts the euro-to-dollar rate at 1.20 by year-end. UBS Global Wealth Management's Chief Eurozone and UK Economist Dean Turner remains constructive on EUR assets, favoring a stronger euro and attractive carry opportunities in fixed income and credit.

However, MUFG sees the support for the euro as temporary, with an intensifying energy price shock ultimately favoring the USD over the EUR. The market has yet to reward the hawkish turn, with the euro-to-dollar rate trading at 1.1601 on Friday.