EUR/USD: Lagarde’s dovish tilt weighs on Euro – ING
Francesco Pesole at ING says EUR/USD downside risks have increased after dovish comments from European Central Bank (ECB) President Christine Lagarde, which widened SOFR-ESTR spreads and tempered expectations for an October ECB hike.
Lagarde's cautious tone at the ECB has put downward pressure on the EUR/USD exchange rate, as highlighted by ING. The widening spread between the SOFR-ESTR 2-year swap, now exceeding 155 basis points, suggests that market expectations for an October hike have been tempered. Lagarde's comments indicate that she believes tight financial conditions are limiting the transmission of energy costs to the broader economy, and the ECB should adopt a measured response to avoid second-round effects.
This aligns with the prevailing belief that if a central bank hikes rates in October, it will likely be the Federal Reserve rather than the ECB. Market pricing indicates a 17 basis points and 9 basis points difference between the Fed and ECB hikes, respectively. Our macro team anticipates that both the Fed and ECB will postpone rate hikes until December, which could lead to a higher EUR/USD exchange rate by the end of the year.
However, any significant positive US economic data could trigger a test of the 1.1320-30 summer lows, potentially providing support to the euro in the short term.
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