FX.co ★ berta.hill | EUR/USD

I went through the Fed and ECB material for the coming week, and the main conclusion is this: both central banks will most likely take a pause, but the rhetoric will be different. The Fed will retain a hawkish tilt, hinting at December, while the ECB will probably be more cautious because of the French crisis. It is this combination that will determine where the pair moves after the meetings, not the rate decisions themselves, which the market has already priced in. Regarding the Fed, the picture is as follows. Meeting on October 27–28, the market prices the probability of the rate remaining in the 3.75–4.00% range at 89–93%. This is practically decided, and there is little suspense around the decision itself. However, a pause does not mean easing. About 81% of traders are pricing in a hike in December, and economists surveyed by Reuters are almost unanimous in expecting a pause now, but all expect a hike in December. The key intrigue is Worsh's press conference. He fundamentally avoids forward guidance, so the market will be hunting for hints. If he confirms a December hike, the dollar will strengthen. If he stays silent or gives a dovish signal, pressure on the dollar will ease. FXStreet expects the Fed to raise rates in December and March, and EURUSD over a 6–12 month horizon will fall to 1.10; this is a bearish medium-term outlook for the pair. The situation at the ECB is no less interesting. Meeting on October 29, the consensus is almost unanimous: the deposit rate will remain at 2.50%, probability of a pause is over 90%. However, a December hike to 2.75% is priced in by the market. Danske Bank expects the final 25 bp. increase in December, after which the rate will remain at that level in 2027. Intesa Sanpaolo also sees a pause in October and a possible hike in December. But there is an important nuance. Lagarde will likely keep full flexibility and not give firm guidance. Moreover, comments from council members after the September meeting have been less hawkish than Lagarde’s press conference. They increasingly take into account demand destruction and the absence of second-round inflation effects, which means the ECB is not ready to act as decisively as the Fed. Separately on France, because this is the main risk for the euro. Moody’s decision to keep the rating at Aa3 with a negative outlook gave the euro a breather, but did not solve the problem. The spread between French OATs and German Bunds remains at historical highs, around 150–160 basis points. Until that gap narrows, the euro will be vulnerable. Moreover, the ECB has made it clear that France cannot use the TPI to stabilize its bonds while it does not overcome its political impasse and present a convincing plan of fiscal consolidation. This limits the ECB’s ability to defend the euro if the situation deteriorates, and the market is taking that into account. What this means for the pair. The pair is stuck in a range, and both meetings are unlikely by themselves to be a trigger for a strong move, because the market has already priced in a pause from both central banks. Bullish scenario: if Worsh gives a dovish signal and does not confirm December, and Lagarde, conversely, hints at a December hike, the euro will get support. A break of 1.12500 will open the way to 1.13503. Bearish scenario: if Worsh confirms December and Lagarde stays quiet, the dollar will strengthen. Holding the price below 1.12201 will return focus to 1.11540–1.11454. The main risk for the euro is not the Fed, but France. While spreads remain wide, any rally will be limited. Good luck.