EUR/USD: A return to 1.10 will have to wait – SocGen

Hawkish pushback by the Fed but also the ECB – it is premature to discuss rate cuts – would primarily bring the axe down on the 2y-5y part of the curve but won’t leave the long end completely immune to the rate repricing.

Downside against the Euro has been nullified by the pricing in of faster rate cuts by the ECB next year compared to the Fed. Until this changes, a return to 1.10 will have to wait. 

Three key questions should decide how markets respond to the Fed: 1/ What does lower unemployment mean for the inflation forecast? 2/ Will the additional rate increase remain on the table? 3/ Does the dot plot for next year add to the two rate cuts of September?

The question is whether the ECB will tone down the hawkish language in Thursday’s statement and whether the inflation forecasts will be revised down to the point where the 2% target will be met in 2025. Headline CPI was previously forecast to average 3.2% in 2024 and 2.1% in 2025. Discussions about tapering PEPP sooner than in late 2024 could in theory give yields and the Euro a lift, but we are not getting too carried away.