ING's Francesco Pesole points out that strong statements from the European Central Bank are making interest rates on the Euro less likely to drop compared to the US, where the Fed's rate cuts are easier to predict. ING believes this difference could push up the value of the Euro against the US Dollar and other currencies, but it still expects the EUR/USD exchange rate to stay around 1.160 by the end of the second quarter, assuming the ECB doesn't raise rates and the Fed cuts rates twice.
Sticky ECB expectations back Euro resilience.
The ECB only focuses on controlling inflation, and its officials have been more clearly willing to raise interest rates so far. Yesterday, the most cautious member of the Governing Council, Fabio Panetta, talked about stopping a situation where wages and prices keep rising together. Even though he said any policy changes should be reasonable, the fact that he mentioned 'action' as the usual approach suggests he might be hinting that rate increases could be expected.
These comments suggest that the EUR front-end rates might stay higher for longer as markets could need some more gentle statements from the ECB to avoid further rate increases, even if oil prices continue to fall. This morning, markets quickly reduced their expectations of ECB tightening by 63 basis points, but there was still strong support for the more aggressive rate hike views from yesterday.
If the oil prices drop a lot, it becomes easier for markets to lower the value of the USD swap curve compared to the EUR one, which increases the chances of the EUR/USD currency pair going up.
That also enhances the euro's potential against other currencies where rate expectations are more susceptible to a dovish repricing (like SEK, GBP) or more closely tied to oil prices (CAD, NOK).
Given our base case remains with no ECB action and two Fed cuts, we remain cautious with our EUR/USD call at 1.160 for the end of 2Q.
Sticky ECB expectations back Euro resilience.
The ECB only focuses on controlling inflation, and its officials have been more clearly willing to raise interest rates so far. Yesterday, the most cautious member of the Governing Council, Fabio Panetta, talked about stopping a situation where wages and prices keep rising together. Even though he said any policy changes should be reasonable, the fact that he mentioned 'action' as the usual approach suggests he might be hinting that rate increases could be expected.
These comments suggest that the EUR front-end rates might stay higher for longer as markets could need some more gentle statements from the ECB to avoid further rate increases, even if oil prices continue to fall. This morning, markets quickly reduced their expectations of ECB tightening by 63 basis points, but there was still strong support for the more aggressive rate hike views from yesterday.
If the oil prices drop a lot, it becomes easier for markets to lower the value of the USD swap curve compared to the EUR one, which increases the chances of the EUR/USD currency pair going up.
That also enhances the euro's potential against other currencies where rate expectations are more susceptible to a dovish repricing (like SEK, GBP) or more closely tied to oil prices (CAD, NOK).
Given our base case remains with no ECB action and two Fed cuts, we remain cautious with our EUR/USD call at 1.160 for the end of 2Q.
