The Fed and the ECB are likely to hold rates at their October meetings, while December hikes stay on the table. French bond market tensions could constrain the ECB and weigh on the euro, and EUR/USD remains in a descending channel.
The Federal Reserve and the European Central Bank are likely to leave interest rates unchanged at their October meetings. A pause would not necessarily mark the end of monetary tightening, though. Persistent inflation and resilient economic activity support further increases in December.
Inflation remains too high
Price pressures on both sides of the Atlantic remain too strong for central banks to declare victory. In the US, annual PCE inflation stood at 3.4% in August, while the core measure reached 3.0%. In the euro area, headline inflation rose to 3.8%, with core inflation at 2.5%.
Higher energy costs could also feed through to other goods and services, which complicates the return to target. Relatively resilient activity, meanwhile, reduces the likelihood that weaker demand alone will quickly contain price growth.
Caution favoured in October
Recent central bank communication suggests that caution will prevail in October. After September's rate increases, policymakers have reasons to assess their effects first. Geopolitical uncertainty and higher government bond yields also strengthen the case for a pause.
French debt tensions complicate the ECB's decision
France presents an additional challenge for the ECB. The spread between French and German ten-year government bond yields has approached 175 basis points, reflecting concerns about public finances.
Another rapid rate increase could raise borrowing costs further and intensify market tensions. A December hike therefore remains conditional on the French debt market avoiding a more serious deterioration. A 25-basis-point increase by both central banks in December remains the base case, while the outlook for tightening next year is less clear.
EUR/USD stays in a descending channel
For the euro, monetary policy expectations are only part of the picture. A further deterioration in French public finances could weigh on the currency even if the ECB maintains a hawkish message.
EUR/USD has been trading within a descending channel since February 2026, and the latest upward correction ended around 1.1279. The nearest support lies at 1.1115, last week's low. A break below could pave the way towards the channel's lower boundary, near 1.1000.
A recovery above 1.1279 could instead allow the correction to extend towards the 1.1340 area.
Source: ActionForex
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