We now expect both the ECB and the Fed to hike rates in December. Here, we discuss our new calls and why we're keeping our EUR/USD profile unchanged, still targeting 1.160 for year-end. We expect oil to dominate as an FX driver this week, with President Trump expected to meet Gulf state members and President Xi Jinping. USD/JPY risks remain on the upside.
We see mostly downside risks for EUR/USD this week.
USD: Big summits this week
The dollar lost some ground on Friday after a reported Bank of Japan rate check (more in the JPY section below), but in our view it remains on solid footing. We recently updated our Fed call and now expect one final hike this year. December remains more likely than October, partly because of its proximity to the midterms, although stronger data and further gains in energy prices could encourage markets to add to the 13bp currently priced for next month. If markets assign at least a two-thirds probability to a hike by decision day, the Fed may feel compelled to act, even without full conviction, to avoid unwanted volatility at the back end of the curve.
The scope to keep pricing a more hawkish Fed after the September FOMC remains a key argument for further US dollar gains. While we still see near-term upside risks for the greenback, our year-end and longer-term view is unchanged and gradually USD negative. We remain materially more dovish than market pricing on the Fed and continue to use a sharp decline in oil prices in 4Q as our baseline scenario.
With little on the data calendar, oil should be the key driver for the USD this week. Investors will focus on US President Donald Trump’s meetings with Gulf state representatives, reportedly taking place in New York alongside the UN General Assembly. Crude has softened in recent days, but the market still lacks enough encouraging news to push prices back below $100/bbl.
Trump is also due to meet Chinese President Xi Jinping in Washington on Thursday. While this shouldn’t be a major market event, positive trade headlines could provide some support to the dollar.
EUR: ECB speakers still hinting hawkish
Two more regional elections this weekend added fuel to Germany’s ruling Christian Democratic Union (CDU) party’s crisis. The far-right Alternative for Germany (AfD) won Mecklenburg-Vorpommern, where the CDU missed the 5% threshold to enter the State parliament, and the Left Party won Berlin. Our macro team argues here that both outcomes mostly reflect local dynamics rather than a verdict on Chancellor Friedrich Merz’s reform agenda. Still, with CDU support falling and the political landscape becoming increasingly fragmented, delivering that agenda may become more challenging. These developments add some clouds to the euro, but are not enough to displace rate differentials and oil as its primary drivers.
Alongside our Fed call, we’ve changed our ECB forecast and now expect another hike in December. However, we’ve kept our EUR/USD profile unchanged, still targeting 1.160 for year-end. The main reason is that EUR and USD front-end swaps – the most relevant for FX – look quite similar. There are 33-37bp priced in by year-end and 80-90bp by July. Since we see only one more hike by both central banks this year and then a prolonged pause, the dovish repricing should be similar in size. That is often associated with a slightly higher EUR/USD as lower USD rates tend to have a positive knock-on effect on global risk sentiment. Incidentally, we expect that repricing to happen on the back of lower energy prices, also a EUR/USD positive.
For this week, we still see mostly downside risks for EUR/USD, though. A retest of the 1.1320-30 lows from June looks premature and is not supported by our short-term fair value model. Nevertheless, it would become a realistic scenario if Brent moves back towards $110/bbl and markets increase pricing for an October Fed hike.
JPY: Intervention risk remains high
A reported Bank of Japan rate check on Friday pushed USD/JPY below 157.0. If confirmed, it may suggest that Japanese authorities are focused more on the pace of moves over a rolling x-day period than on defending a specific level.
The hope is that this approach avoids creating a clear line in the sand for markets to target and helps keep positioning cautious. Nevertheless, the Fed has sounded distinctly more hawkish than the Bank of Japan this month, leaving room for further USD/JPY gains.
Against that backdrop, a return to 160.0 still looks consistent with prevailing conditions, although intervention risk remains clearly elevated.
CEE: Rating downgrade adds to a bearish regional outlook
The second half of the month is typically quieter in CEE, with little beyond tomorrow's National Bank of Hungary's meeting likely to attract market attention. Headlines from the Middle East and US over the weekend suggest a slightly positive open for markets today. On Friday, Moody’s downgraded Poland to A3, bringing its rating in line with S&P and Fitch. Although bond markets may have partly priced this in, some aversion to Polish bonds is likely this morning.
Today’s calendar includes Poland’s August wage data, a key indicator for the central bank. Polish retail sales follow tomorrow, alongside the National Bank of Hungary meeting. The NBH is expected to pause its current “mini” easing cycle, leaving the policy rate at 5.50%. It will also publish a new forecast and may review its inflation target, potentially outlining a two-step reduction from 3.0% to 2.0%.
In the Czech Republic, consumer demand data is due on Thursday, followed by Friday’s Czech National Bank minutes, which should provide more detail on last week’s board discussion.
CEE currencies remain weak, and we retain a bearish outlook for the week ahead. Limited progress in the US-Iran conflict, high energy prices and a stronger US dollar should continue to hinder any recovery. After last week’s CNB meeting, we still see 24.300–24.350 as fair value for EUR/CZK. By contrast, EUR/PLN has further upside potential, with today offering an early test after the rating downgrade. EUR/HUF may rise today, but tomorrow’s NBH meeting should provide temporary support to the forint, potentially allowing EUR/HUF to test 362.
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