ECB preview: MUFG sees October hold, two hikes ahead. See EUR/USD year end at 1.12

MUFG expects the European Central Bank to hold rates at its October meeting and then deliver two rate hikes thereafter, and it forecasts EUR/USD at 1.12 by year-end. The core transmission channel is the policy rate differential: a hawkish ECB path narrows the gap with the Federal Reserve's expected trajectory, which tends to support the euro through higher relative yields and capital inflows into euro-denominated assets. The euro is the most directly exposed currency, since its valuation against the dollar hinges on whether the ECB is repricing toward tightening faster than the Fed. The dollar is exposed on the other side of the pair, so any shift in relative rate expectations feeds straight into USD crosses, while European front-end rates and bund-OAT-BTP spreads should also react to the hike timing. The next concrete catalyst is the ECB's October policy decision and the accompanying staff projections, where any change in the inflation outlook will determine whether markets price the forecast two-hike path.

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