European Central Bank Meeting Takes Center Stage
The European Central Bank (ECB) meeting is the main event in the foreign exchange market today. Last week, the ECB took a hawkish turn, and investors are waiting to see if this will be backed up by changes in forecasts and rhetoric. The ECB’s forecasts for inflation are a major focus, particularly the consumer price index (CPI) profile, which poses a significant risk to the euro.
Inflation Forecasts and Their Impact on the Euro
In September, the ECB forecasted headline and core inflation rates of 1.7% and 1.9% for 2026, and 1.8% and 1.9% for 2027. However, the delay in the ETS2 carbon tax could reduce the 2027 headline forecast by 0.2%, and a new 2028 CPI forecast of around 1.8% could be awkward for ECB President Christine Lagarde to explain, given the inflation undershoot. This could lead to a decrease in the short-end of the euro interest rate curve, causing a brief sell-off in EUR/USD to the 1.1680/1700 area.
Growth Forecasts and Their Potential Impact
The growth forecasts are also under scrutiny, with predicted rates of 1.2% for 2025, 1.0% for 2026, and 1.3% for 2027. There may be some modest upward revisions to these forecasts. Additionally, large EUR/USD option strikes are rolling off in the 1.1750/1800 area over the coming days, which could influence the thinning year-end markets.
Other Central Bank Meetings
Riksbank Meeting
The Riksbank is holding a rate meeting, and after cutting rates to 1.75% in September, it is positioning itself for a prolonged period of no changes. Although it may be too early for the Riksbank to consider a hike, any upward revision to the policy rate forecasts could give the Swedish krona (SEK) a brief boost.
Norges Bank Meeting
In Norway, the Norges Bank seems unwilling to cut the 4.00% deposit rate. New policy rate forecasts are expected, and the market is pricing in 30 basis points of rate cuts by the May meeting. However, it is difficult to see the need for the Norges Bank to bring forward the forecasted 2026 rate cut to the first quarter. The EUR/NOK has already been rallying due to the soft oil story, and it is expected to continue to meet good offers above 12.00.
EUR/HUF and the Unwinding of Carry Trades
The long forint has been one of the most popular carry trades this year, but a big unwind is underway after the National Bank of Hungary’s dovish shift this week. This may have further to run, and EUR/HUF is worth keeping a close eye on.
Conclusion
In conclusion, today’s ECB meeting is a crucial event in the foreign exchange market, with investors focusing on inflation and growth forecasts. The Riksbank and Norges Bank meetings are also significant, and the unwinding of carry trades in EUR/HUF is a notable development. As the year comes to a close, these events will shape the direction of the euro and other currencies, and investors should be prepared for potential fluctuations in the market.
