HSBC’s report examines the European Central Bank’s (ECB) decision to keep its key deposit rate steady at 2%, considering the potential effects on the euro. It indicates that external developments and fiscal policies may play more of a role in shaping the euro’s trajectory by 2026, given the ECB’s unchanged approach.
The ECB’s recent forecasts, seen as hawkish, show an increase in growth expectations to 1.2% for 2026 and 1.4% for 2027, up from prior estimates of 1.0% and 1.3%. Limited inflation reductions are anticipated over the next two years.
Economists Predictions on ECB Stance
Economists predict the ECB will maintain its current stance through 2026, with the possibility of a rate hike in 2027. With policy stability, global developments may more greatly affect the euro’s path. The euro could face challenges if regional fiscal policies do not meet expectations or if economic conditions elsewhere become less favourable.
The FXStreet Insights Team compiles observations from market experts, with contributions from internal and external analysts, to provide various views. This content delivers insights into market trends and potential influences on currencies.
The European Central Bank is signaling a steady hand, keeping its key rate at 2%. While we see upgraded growth forecasts for 2026 and 2027, the bank’s plan to hold rates through next year means our focus must shift. The euro’s direction will now be driven more by events outside the ECB’s direct control.
Policy Gap with US
We should pay close attention to the policy gap forming with the US, where the Federal Reserve is still battling more persistent inflation. The latest US CPI data for November 2025 came in at 3.1%, keeping pressure on the Fed to remain hawkish, unlike the stable ECB. This divergence supports strategies that favor the US dollar over the euro, such as buying EUR/USD put options heading into the new year.
Internal European politics also present a risk, specifically around fiscal discipline. Recent discussions in Brussels about enforcing the Stability and Growth Pact in early 2026 are creating uncertainty that wasn’t present earlier in 2025. Any signs of fiscal strain could act as a significant headwind for the euro, independent of the ECB’s stable monetary policy.
The ECB’s predictable path suggests that implied volatility for the euro may be overpriced in the coming weeks, especially during the typically quiet holiday trading period. Looking back at the 2014-2016 period, extended ECB policy stability often led to compressed volatility, rewarding those who sold options. Therefore, we see an opportunity in strategies that profit from low price movement, like selling short-dated EUR strangles.
