European Central Bank: Neutral communication with upside inflation risks – Nordea

Nordea's Chief Analyst Jan von Gerich interprets the European Central Bank's (ECB) September monetary policy account as suggesting additional rate hikes, potentially in December and March. The ECB continues to prioritize potential upside inflation risks, particularly from ongoing energy shocks and robust economic growth. Simultaneously, the ECB refrains from making definitive commitments, emphasizing data dependence and neutral communication as it navigates high geopolitical and market uncertainties.

The ECB's September monetary policy account bolsters the notion that the Governing Council primarily remains concerned about upward inflation risks. Although indirect and second-round impacts from the energy shock have thus far been minimal, policymakers are apprehensive that a thriving economy might eventually permit more widespread price pressures to manifest.

The outlook remains highly uncertain and contingent on geopolitical developments, with risks leaning towards the upside for inflation and the downside for economic growth. Despite this, the ECB has made it clear that it will not pre-commit or offer clearer forward guidance, maintaining flexibility amid the prevailing uncertainty.

The analysis aligns with the team's baseline projection of further 25 basis points (bps) rate hikes in December and March. While the ECB has not yet observed broad-based inflation pressures, it is increasingly concerned that persistent energy price shocks and a resilient economy could ultimately yield more substantial indirect and second-round effects.

Following recent rate repricing driven by concerns surrounding France, current market pricing is once again aligned with the team's baseline. Factors such as the geopolitical risk premium, hawkish statements from the Federal Open Market Committee (FOMC) minutes, and higher US bond yields continue to underpin the US Dollar against the euro. Consequently, the US Dollar remains supported at the expense of the euro during this period.

Meanwhile, the Japanese Yen sees a slight recovery, with USD/JPY falling below 158.00 as speculation arises that authorities might intervene to support the currency. In the meantime, profit-taking in the US Dollar drives its retreat from near an 18-month peak, despite hawkish FOMC minutes and the risk of further escalation in Middle Eastern tensions, which contribute to the pair's decline.

Gold experiences a rebound, rising back towards the $4,150 mark per troy ounce due to gains stemming from the weakening US Dollar and a slight drop in US Treasury yields (10-year to 30-year segment).