The European Central Bank (ECB) left policy unchanged as expected, but upward revisions to growth and inflation forecasts triggered a reversal of pre-decision EUR weakness, even as enthusiasm around late-2026 rate hikes remains tentative, TDS' economists report.
Rate differentials seen as secondary near term
"The ECB was on hold as expected with EUR reversing the pre-decision weakness on the upgrade in growth and inflation forecasts. We don't think that relative interest rate differentials will be a big driver for the EUR in the imminent horizon even though markets have been trying to get excited about potential hikes at end of 2026."
"We expect EUR to keep moving higher into Q1 26 on weak USD sentiment, more downside risks to the labour market and interest rates in the US, continued loss of safe-haven appeal for the greenback, and reduced tail risks to the EA outlook from Russia-Ukraine or China."
