Goldman economists expect ECB to raise rates by 25 basis points

Goldman Sachs expects the ECB to raise rates by 25 bps on Thursday, with inflation forecasts for 2027 and 2028 likely revised higher due to persistent energy shocks. The report suggests the move is already fully priced, limiting immediate EUR/USD impact, though further hikes in 2026 could still affect the euro. Oil and gas-linked risks remain a key backdrop as U.S.-Iran talks continue despite new strikes.

Analysis

The market is treating this as a rates headline, but the bigger signal is regime persistence: if energy shocks are sticky enough to push out the ECB’s inflation path, Europe’s policy-sensitive assets are entering a slower-growth, higher-real-rate environment even without additional hikes. That is a negative for European cyclical credit, small caps, and domestic demand proxies, while sectors with pricing power and dollar-linked revenues should outperform. The key second-order effect is that EUR strength may be capped not by policy differentials alone, but by the terms-of-trade hit from sustained energy import costs.

For FX, the near-term reaction function is asymmetric. With one hike largely priced, EUR/USD upside requires a credible shift in forward guidance rather than just the delivered decision; absent that, the pair should trade more off front-end rate volatility and energy prices than on the headline move itself. If geopolitical risk keeps natural gas elevated for several weeks, the euro’s “funding currency” role becomes more credible, and carry demand could re-emerge against higher-beta European assets.

The contrarian angle is that consensus may be underestimating how quickly this becomes a growth story rather than an inflation story. Markets tend to fade isolated energy disruptions, but Europe’s elasticity is lower: once input costs constrain industrial activity, the ECB can end up tightening into weakening PMIs, which is usually when the euro stops benefiting from rate hikes and starts trading like a recession proxy. That creates a window where EUR strength can coexist with equity underperformance, but only briefly.

For Goldman, the read-through is indirect: this is supportive for the bank’s macro franchise and trading volumes, but not a clean equity catalyst because the market already discounts the hike. The more relevant equity implication is dispersion — banks with better deposit beta control and less domestic credit exposure should hold up, while rate-sensitive lenders and cyclicals face margin compression if energy remains elevated into the next 1-2 quarters.

Key Decisions for Investors

• Short Euro Stoxx cyclicals via SX5E futures or a basket of EU industrials for 1-3 months; thesis is earnings downgrades from persistent energy costs outweigh a fully priced ECB hike. Risk/reward: ~2:1 if gas stays elevated and PMIs soften.
• Long USD vs EUR on dips using EUR/USD puts or a put spread with 4-8 week tenor; need only modest downside if the ECB delivers as expected but fails to sound more hawkish. Stop if ECB signals consecutive hikes with higher conviction.
• Pair trade: long European defensives (staples/utilities with regulated pricing) vs short European domestic cyclicals for 1-2 quarters; protects against growth compression while keeping some inflation pass-through exposure.
• For rates, consider a front-end steepener in Europe if the market overprices a prolonged hiking path; if energy shock hits activity, the long end should rally faster than the front end over the next 1-2 months.
• If you need a cleaner macro hedge, buy EUR/USD downside via risk-reversals into the meeting rather than outright shorts; asymmetry is better because a hawkish surprise can squeeze the pair, while a neutral outcome likely underdelivers on euro upside.