MUFG sees ECB hike this week, flags downside risk for euro

MUFG forecasts that the European Central Bank (ECB) will deliver a 25-basis-point interest rate increase at its upcoming monetary policy meeting in Berlin. Because this rate hike is already fully priced into financial markets, the euro and eurozone interest rates are anticipated to react primarily to President Christine Lagarde's forward guidance during the post-decision press conference rather than the policy decision itself. With market participants currently pricing in approximately 75 basis points of additional ECB rate tightening by mid-2026, the bar for a hawkish surprise is notably elevated. MUFG expects modest downside risks for the euro if the central bank fails to clearly endorse further rate hikes before the end of the year, maintaining a baseline view of a terminal policy rate at 3.00%. Over the near term, EUR/USD direction will likely be steered by U.S. dollar dynamics, with fundamental valuations pointing toward the lower boundary of the recent 1.1400 to 1.1800 trading band. Additional downside risks for the single currency include elevated winter energy prices and regional German state elections.