ING strategists Michiel Tukker and Benjamin Schroeder note that markets continue to price two to three European Central Bank (ECB) rate hikes in 2026, with April odds still elevated. They stress that the ECB must balance data dependence with managing expectations along the curve. They highlight Oil as a key variable and see risks of policy action to prevent a price spiral.

ECB walks tightrope on expectations

“Markets are appreciating US efforts to seek a deal, but without concrete steps, the overarching narrative of two to three ECB rate hikes this year remains unchanged. Even for April, market pricing still points to a 60% probability of a hike. The key variable to watch remains the oil price, and that hasn’t really moved much since the start of this week.”

“Still, market pricing, especially for April, appears aggressive against the backdrop of President Christine Lagarde suggesting on Wednesday morning that the ECB would not act until it had enough information and could look through a short price shock, underscoring the differences to the 2022 situation.”

“A more forceful reaction by the ECB could still follow to nip any price spiral in the bud. This is what the market is pricing – and it gels with the relative stability of longer-dated (forward) inflation swaps. But the market is also looking for a partial reversal as indicated by the hump, e.g. in the Euribor futures strip.”

“At this stage, the ECB is engaged in a balancing act of managing market expectations and the curve. If it sounds too doveish, the risk is that the long end runs away as inflation expectations become unmoored. If it sounds too hawkish, growth concerns take over.”

“At some point, even meeting market expectations might be required to keep the balance – and buy time.”

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