ING’s Francesco Pesole notes that recent hawkish rhetoric from the European Central Bank (ECB) is supporting the resilience of Euro front-end rates, making them stickier on the downside compared to US rates, where Federal Reserve (Fed) easing is more easily priced in [1]. This asymmetry is seen as boosting the upside potential for EUR/USD and other Euro crosses, although ING maintains a cautious forecast for EUR/USD at 1.160 by the end of Q2, based on expectations of no ECB hikes and two Fed cuts [1].
ECB officials, including the most dovish Governing Council member Fabio Panetta, have discussed preventing a wage-price spiral and hinted at policy action as a base case, which ING interprets as a nod to hike expectations [1]. Despite markets abruptly trimming bets on ECB tightening to 63 basis points this morning, hawkish bets showed greater resilience yesterday [1].
ING highlights that in scenarios such as an oil selloff, markets may find it easier to reprice the USD swap curve lower relative to the EUR curve, further increasing the upside potential for EUR/USD [1]. The euro's strength is also expected against currencies where rate expectations are more vulnerable to dovish repricing, such as SEK and GBP, or those more exposed to oil prices like CAD and NOK [1].
While the ECB's inflation mandate and hawkish tone are supporting Euro resilience, ING remains cautious, reiterating its base case of no ECB action and two Fed cuts, with a EUR/USD end-Q2 target of 1.160 [1].
CONCLUSION
Hawkish ECB rhetoric is underpinning Euro resilience and boosting upside potential for EUR/USD, especially as Fed easing is more easily priced in. ING remains cautious, forecasting EUR/USD at 1.160 for end-Q2 with no ECB hikes and two Fed cuts. Market participants should monitor ECB communications and oil price movements for further direction.