ING analysts suggest that the European Central Bank (ECB) is likely to deliver two rate hikes this summer, with more than a 50% probability, as a form of 'insurance' against falling behind the curve rather than a direct response to current inflation data. This approach is influenced by the ECB's experience with inflation in 2022, when headline inflation exceeded 8% year-on-year and the ECB was criticized for reacting too late. Currently, headline Eurozone inflation remains moderate and survey-based expectations are easing, but institutional memory is driving the push for tightening. ING's Carsten Brzeski notes that the risk of doing nothing is perceived as greater than the risk of adverse effects on growth from higher interest rates. However, he also points out that weak sentiment indicators and the absence of fiscal stimulus make it unlikely the ECB would aggressively fight an exogenous supply shock at the cost of worsening an economic downturn [1].
On the currency front, ING's Chris Turner highlights that the market has already priced in a 25 basis point ECB hike and further tightening, with about 75 basis points of tightening expected through early next year. Today's hike is fully priced into money markets, and another 25bp hike is anticipated by September. Turner argues that unless the ECB signals the possibility of another hike in July (with only 8bp priced so far), the scope for higher short-term EUR swap rates—and thus for EUR/USD gains—remains limited. He sees resistance for EUR/USD at 1.1565/75, with vulnerability towards 1.1500 if US Producer Price Index (PPI) data is strong. The aggressive pricing of ECB tightening in response to a stagflationary shock may have reached its limit for now [2].
Both sources emphasize that the ECB's actions are shaped by past inflation shocks and that current market pricing reflects expectations for a hawkish stance. However, the potential for further euro appreciation is constrained unless the ECB provides clearer guidance on additional hikes. The bond market's role in tightening financial conditions and the lack of fiscal stimulus are also noted as factors influencing the ECB's decision-making process [1][2].
CONCLUSION
The ECB is expected to pursue summer rate hikes as a precautionary measure, but with tightening already priced in, the euro's upside against the US dollar appears limited. Unless the ECB signals further hikes, market reactions are likely to remain contained, reflecting cautious optimism but limited momentum for EUR/USD gains.