October ECB cheat sheet: French malaise shouldn’t prompt a dovish turn

The ECB should hold rates at 2.5% while keeping the door open to a December hike, limiting the market impact of French bond turmoil.

• A hike at the October meeting is considered highly unlikely, with close to zero chance priced in, as inflation remains contained and Christine Lagarde has sounded less hawkish.
• The key signal will be the wording around December because the meeting will not include new economic projections; markets are pricing around 20 basis points of further tightening.
• A surprise 25-basis-point hike could widen French government bond spreads, push equities lower and potentially reduce 10-year Bund yields as growth concerns return.
• The euro remains about 1-1.5% undervalued against short-term fair value and has been weakened by both fiscal-risk concerns and lower ECB rate expectations.
• If the ECB maintains its tightening bias, the euro should remain broadly stable and French spreads may have less capacity to generate another major decline in EUR/USD.

Takeaway: Investors should expect limited repricing if the ECB delivers a neutral hold while preserving the December option, with ING retaining a preference for EUR/USD to return to 1.120-1.130 over the coming weeks.