ING’s scenario analysis frames a hawkish-leaning hold as the base case, with EUR/USD seen holding around 1.140 and 10-year Bund yields near 3.15% under that outcome. A more dovish tilt would likely pull EUR/USD back toward 1.130 and Bund yields toward 3.05%, while a surprise 25bp hike could push EUR/USD to 1.150 and Bund yields to 3.20%. ING said rates continue to take their cue from oil, with a September hike already close to fully priced in barring an easing in crude prices. On FX, the bank sees a hawkish ECB as necessary but not sufficient to keep EUR/USD above 1.140, with a retest of the June low near 1.133 flagged as a near-term risk.
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Earlier:
- FX strategists eye ECB hawkishness as Middle East risk lifts euro case
- Preview – ECB seen holding at 2.25% as Middle East conflict clouds outlook, September hike still in play
- Preview – Deutsche Bank sees ECB pausing this week before a September rate rise
The ECB is set to stay quiet on rates, but oil and the Fed may end up doing the talking.
Summary:
- The ECB is expected to hold rates on 23 July, with markets pricing in less than a 5% chance of a hike, according to ING.
- ING’s baseline scenario is a hawkish-leaning hold, with hints of a September hike likely to surface via a post-meeting media leak rather than the official statement, per the bank’s note.
- ING’s scenario table puts EUR/USD at 1.140 and 10-year Bund yields at 3.15% under its hawkish base case, against 1.150 and 3.20% in a very hawkish 25bp-hike scenario, according to the bank.
- A September hike is already almost fully priced into markets and unlikely to shift unless oil prices ease, ING said.
- Real rates are notably higher than a few months ago, helping explain why 2-year euro swap rates have hit fresh highs even with Brent still below $100, per ING.
- ING attributed part of the shift to a less dovish than expected stance from Federal Reserve Chair Kevin Warsh, which it said has turned global sentiment more hawkish.
- The EUR:USD two-year swap rate differential has tightened by around 25bp since the early July escalation in the Gulf, according to ING, but the bank still flags a retest of the June low near 1.133 as a near-term risk for EUR/USD.
The European Central Bank is widely expected to leave interest rates unchanged at its meeting on 23 July, with markets pricing in less than a 5 percent chance of a hike, according to ING. Analysts at the Dutch bank said the expected hold marks a natural continuation from June’s rate increase, which was largely driven by higher energy prices and felt more like an insurance move than the start of a broader tightening cycle.
Even so, ING said the steady stream of geopolitical and energy market headlines since June means a surprise hike should not be entirely ruled out. Among the more realistic hold scenarios, the bank’s own baseline leans hawkish. Without updated economic projections at this meeting, ING expects the tone of the communication itself to do much of the work, with the hawkish wing of the governing council likely to remain dominant. That would keep market pricing skewed toward one or two additional rate hikes by year end and help limit the risk of inflation expectations becoming unanchored. ING suggested a message reinforcing September as the likely date for the next hike may not appear in the formal statement or press conference, but could still emerge through a post meeting media leak, a pattern the bank described as now familiar.
On rates, ING said markets are following a similar playbook to earlier in the Iran conflict, with oil price moves quickly reflected in tighter monetary policy expectations. A September hike is already close to fully priced in, and the bank does not expect that view to shift unless oil prices ease beforehand. Even if the ECB were to surprise with a hike this week, ING said the move would likely be read as pulling forward the September increase rather than signalling a longer tightening path, given that a hawkish surprise would tend to weigh on longer dated inflation expectations. The bank noted that real rates are already notably higher than a few months ago, which helps explain why two year euro swap rates have hit fresh highs even with Brent crude still trading below 100 dollars. That dynamic reflects a firmer growth outlook and a more hawkish read on central bank policy, with ING pointing to a less dovish than expected stance from Federal Reserve Chair Kevin Warsh as an added influence on global sentiment.
On the currency side, ING said the two year swap rate differential between the euro and dollar has tightened by around 25 basis points since the early July escalation in the Gulf, a pattern that echoes what was seen in March. That suggests investors see more room for the ECB to turn hawkish than the Federal Reserve, given the eurozone’s lower starting point for rates. Still, ING noted that markets were reluctant to price the ECB’s deposit rate above 2.75 percent by year end even during the spring oil rally, with pricing currently closer to 2.65 percent. That implies further oil price increases may offer diminishing support for EUR/USD through interest rate channels, while weighing more heavily through broader risk sentiment. ING said a hawkish leaning ECB is a necessary condition for EUR/USD to hold above the 1.140 level, but is unlikely to be sufficient on its own, leaving a retest of June’s low near 1.133 as a near term risk.
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This article was written by Eamonn Sheridan at investinglive.com.