ING’s Francesco Pesole highlights that hawkish comments from ECB officials, including President Lagarde and Peter Kazimir, have reinforced market pricing for a rate hike within six months, though ING still sees this as a lower-probability scenario. He stresses that EUR/USD is now driven mainly by Oil, with the IEA reserve release offering a temporary floor near 1.160.

ECB hawkish tone but Oil dominates

“This morning, we heard a more aggressively hawkish remark by Governing Council member Peter Kazimir, who said a rate hike on the back of the Iran conflict may be closer than thought. That will do little to defuse markets’ aggressive hawkish bets, with a 25bp rate hike fully priced in within the next six months.”

“Our macroeconomists’ view is that this remains a lower risk scenario relative to swap market pricing and our baseline remains, despite all the uncertainty associated with the ongoing conflict, a dovish repricing in the EUR OIS curve.”

“It’s important to note that this does not automatically translate to a view of EUR weakness. The beta of EUR/USD to short-term rate differentials has dropped to virtually zero, meaning expectations for ECB policy moves are having very little impact on the euro.”

“Oil prices remain the absolute primary driver, and the IEA reserve release may be offering some temporary floor for EUR/USD around 1.160.”

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