EUR/USD, GBP/USD flows - Tempered Rate Fears
NFP has tempered Fed rate fears, but the French budget concerns are impacting ECB expectations as well.
Other currency moves against the USD have been more controlled in Europe, though with a slight USD corrective tone. U.S. money markets are now discounting only a small probability of an October hike and any further weak data could raise questions about the 25bps expected in December. However, the market attaches only a 70 to 80% probability to an ECB hike now in December, as the French bond blowout has raised doubts about further ECB tightening. If the ECB has to use the Transmission protection mechanism (TPI) to surpress bond spreads, it could make it more difficult for the ECB council to agree a December rate hike. The bond spread blowout is also tightening financial conditions in France and Italy.
UK rate hike expectations have not been tempered in contrast. However, this may not have lasting benefit for GBP, as the BOE continue to say that the 2027 money market futures are distorted by the bond selloff. The UK money market could temper rate fears in 2027, while still keep November 2026 rate hike prospects high. Additionally, UK and DM rate hike fears reflect high energy prices, but talk in Washington is of an October surprise to help Trump. A 2nd ceasefire would be an October surprise, but would also temper rate hike fears.