Fed and ECB: a pause before further tightening

• The Fed and ECB are likely to hold rates steady in October, while keeping December hikes on the table.
• Persistent inflation and resilient growth support further monetary tightening.
• French bond market tensions could constrain the ECB’s room to raise rates.
• Lower energy prices and tighter financing conditions could reduce the need for additional hikes next year.
• Central bank guidance will shape bond yields, while French fiscal risks could weigh on the euro.

The Federal Reserve and the European Central Bank are likely to leave interest rates unchanged at their October meetings. However, a pause would not necessarily mark the end of monetary tightening. Persistent inflation and resilient economic activity support the case for further increases in December, although tensions in the French government bond market could constrain the ECB.

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%.

The risk that higher energy costs will feed through to other goods and services continues to complicate the return to target. Meanwhile, relatively resilient economic activity reduces the likelihood that weaker demand alone will quickly contain inflation.

The forecasts presented in the source material point to annualised US GDP growth of 3.5% in the third quarter and quarterly growth of 0.3% in the euro area. Such readings would give policymakers additional room to maintain a restrictive stance.

Despite these inflation risks, recent central bank communication suggests that caution will prevail in October. Following September’s rate increases, policymakers have reasons to assess their effects before taking further action. Geopolitical uncertainty and higher government bond yields also strengthen the case for a pause.

For the Federal Reserve, the proximity of the US midterm elections adds political sensitivity to the upcoming meeting. This could reinforce the appeal of waiting, although the inflation outlook remains the central consideration.

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 and the government’s ability to deliver fiscal consolidation.

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 further 25 - basis - point increase by both central banks in December remains the base case. The outlook for additional tightening next year is less clear.

A normalisation of oil supplies from the Middle East could lower energy prices and gradually ease inflation. At the same time, elevated long - term bond yields are already tightening financing conditions, potentially reducing the need for further policy rate increases.

Markets will focus on the guidance accompanying any October pause. A clear signal that December hikes remain on the table could limit declines in short-term bond yields.

For the euro, however, 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.

There is no doubt that EUR/USD has been trading within a descending channel since February 2026. The latest upward correction ended around 1.1279, and the pair is now moving lower again. The pattern of lower highs and lower lows confirms that sellers remain in control.

The nearest support lies at 1.1115, last week’s low. A break below this level could pave the way towards the channel’s lower boundary, near 1.1000. Conversely, a recovery above 1.1279 could allow the correction to extend towards the 1.1340 area.