EUR: Dovish risks as Lagarde ducks guidance – ING

ING’s Francesco Pesole argues that recent mixed signals from global central banks will likely encourage the ECB to avoid firm guidance, especially given its sensitivity to Oil after 2022. With around 55bp of hawkish repricing in one-year ECB expectations, ING sees dovish risks for Euro rates and expects EUR/USD could trade back close to 1.140 by week’s end.

ECB repricing points to downside risks

"The four G10 central banks that have met so far this week have sent mixed signals to the ECB. The Reserve Bank of Australia has brought forward a cut that appeared scheduled for May, the Bank of Canada stated that it is looking through the inflation bump, the Fed kept its projections for one more 2026 cut unchanged, and the BoJ tried to sound cautiously hawkish."

"The ECB has a history of a relationship with oil prices, and the memory of the 2022 inflation scares are likely still vivid. But for several reasons, this is not a 2022 rerun, in our view, and we think it’s quite plausible that President Lagarde will use cautious, non-committal language like Powell."

"Still, the 55bp hawkish repricing in one-year ECB rate expectations in March means even subtle hints can have an amplified impact on short-term rates. And it’s exactly the size of that repricing that makes us think risks are on the dovish side today: matching current pricing would require some degree of guidance that we doubt the ECB is prepared to offer yet."

"This translates to some downside risks for the euro, but remember that FX has lost sensitivity to rate differentials as oil prices have taken over the overwhelmingly dominant driver. In other words, the euro didn’t benefit from the hawkish repricing, and it shouldn’t suffer too much from a dovish re-adjustment. Still, we could be trading back close to 1.140 before the end of the week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)