TD Securities' Macro Research team anticipates that the European Central Bank (ECB) will continue its measured tightening cycle, delivering a final 25 basis point (bp) hike in December. This would bring the ECB deposit rate to 2.75%, which TD describes as 'mildly restrictive' given resilient growth and persistent inflation pressures in the Eurozone [1].
Despite current market pricing, which suggests around 31bp of ECB tightening by the end of 2026 and nearly 100bp cumulatively by the end of 2027—implying a terminal rate close to 3.5%, well above the 2.5% neutral rate referenced by several ECB policymakers—TD Securities does not expect the ECB or other major central banks to validate the full extent of these expectations [1].
TD maintains a bullish EUR/USD year-end forecast, arguing that market pricing overstates future tightening and that policymakers may soon push back against these expectations. The team recently expressed this view via a 3-month risk reversal to fade the broad-based USD rally [1].
Underlying economic data and inflation indicators are seen as broadly consistent with a measured tightening cycle, supporting TD's outlook for a final hike and a mildly restrictive policy stance [1].
CONCLUSION
TD Securities expects the ECB to deliver one final rate hike in December, taking the deposit rate to 2.75%, and maintains a bullish outlook for EUR/USD. The firm believes current market pricing overstates future tightening, and that policymakers may soon push back against these expectations. Overall, TD sees the ECB's approach as measured and consistent with economic and inflation data.