Another ECB Hike Would Likely Strengthen the EUR

Research evidence excerpt

Another ECB Hike Would Likely Strengthen the EUR

Global Idea

July 23, 2026 10:55 AM GMT

Morgan Stanley & Co. LLCMG10 FX Strategy Andrew M Watrous

Strategist

Another ECB Hike Would Likely Andrew.Watrous@morganstanley.comMorgan Stanley & Co. International plc+ +1 212 761-5287

David S. Adams, CFA

StrategistStrengthen the EUR David.S.Adams@morganstanley.com +44 20 7425-3518

Rising yields usually lift a currency; FX tends to weaken mainly Morgan Stanley MUFG Securities Co., Ltd.+

Koichi Sugisaki

Strategistwhen policy turns restrictive enough to hurt growth or if higher

Koichi.Sugisaki@morganstanleymufg.com +81 3 6836-8428

yields signal fiscal risk. Neither applies to the EUR today. We

expect a tighter ECB to be EUR-positive. Morgan Stanley & Co. LLC

Molly Nickolin

Key Takeaways Molly.Nickolin@morganstanley.com +1 212 761-3592

Higher yields typically strengthen a currency, unless they signal a growth-

damaging policy stance or rising concern about public debt sustainability.

Currencies can underperform after policy turns restrictive, but with a lag and

after first gaining into restriction; the effect varies widely across episodes.

Markets are not pricing ECB restriction deep enough to weaken EUR: Germany's

1y–5y5y spread is -78bp, near-term rates are still below long-run nominal levels.

EUR has risen with European yields in recent quarters, unlike the fiscal-risk

pattern seen in the UK and Japan.

A key risk to EUR remains periphery fragmentation. Widening OAT-Bund and

BTP-Bund spreads would be a signal that markets are starting to price EA fiscal

risk.

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