October ecb cheat sheet french malaise shouldnt prompt a dovish turn

Key arguments

• A more dovish tone on further tightening would be the ECB's first line of defence against bond volatility, ahead of any bond-buying measure.
• An explicit "likely" December hike signal would be a slightly hawkish surprise, but with over 20bp priced in the reaction should be contained.
• An unexpected 25bp hike without clear second-round inflation risks could trigger risk-off, widening French spreads and pushing 10yr Bund yields lower.
• The euro is less sensitive to French spread moves and undervalued 1-1.5% versus short-term fair value, but near-term risks skew lower.

Corresponding source evidence

1. We don’t think it has, and expect the ECB to leave the door open for a December hike, which should shield rates and the euro from a major adjustment.
2. As usual, we also look at three alternative scenarios to our baseline The ECB is expected to leave rates on hold this week at 2.5% This is our market preview of October's European Central Bank meeting; you can find our macro preview here. · this week
3. Signalling that a hike by year-end is “likely” would be a slightly hawkish surprise in our view, even if markets are pricing in 20bp.