Citi analysts say growing fiscal risks in France could prompt the European Central Bank to pause interest rate hikes after December, or earlier if financial stress spreads across the eurozone. The bank said the ECB is shifting its focus toward financial conditions from inflation concerns, raising questions about how much further it can tighten monetary policy. Citi's rates strategists highlighted a reversal in the relationship between ECB rate expectations and the spread between French and German government bond yields, suggesting markets increasingly view policy as overly restrictive. A December rate increase is almost fully priced in, alongside nearly two further hikes in 2027, and Citi sees scope for 50 to 75 basis points of repricing in ECB rates relative to the U.S. Federal Reserve as investors reassess the outlook. Citi's foreign exchange strategists said EUR/USD could fall below 1.10 if the currency undershoots fair value implied by two-year interest rate differentials, with its two-year valuation model suggesting a 50 to 75 basis point reduction in the euro-U.S. rate spread could push EUR/USD toward 1.1075 to 1.1000 even without an additional undershoot. Citi identified receiving ECB rates against Fed rates as its preferred trade, arguing the position could remain attractive if tensions involving Iran ease, since lower commodity prices following an Iran resolution could support French equities, government bonds and the euro.
Citigroup Inc.Citi's strategists discuss ECB pause and recommend receiving ECB vs Fed rates, a macro-rates call affecting the bank's outlook but not a company-specific development.
Citi says EUR/USD could fall below 1.10 as ECB tightening expectations are repriced lower versus the Fed, weakening the euro.
