ING’s Francesco Pesole highlights that EUR/USD price action after the US jobs report underlines the lack of a strong bullish narrative for the Euro, as markets doubt further ECB hikes. Softer inflation and low Oil prices weigh on expectations. ING warns markets may price out ECB tightening before Fed tightening and expects EUR/USD rallies to fade above 1.150-1.153, with a move above 1.16 only later in summer.

Limited upside as ECB doubts grow

“Price action in EUR/USD in the hours after the US jobs report highlights the lack of a convincing bullish narrative for the euro. That is largely explained by markets starting to doubt the ECB will hike again after all, with pricing for September at 11bp and for year-end at 17bp.”

“While ECB speakers have generally tried to hang on to a hawkish tone, President Christine Lagarde and others have conceded that the policy response may not need to be that aggressive from here. Lower-than-expected June CPI this week and oil prices staying stubbornly low mean that some second-round effects on core inflation may well be needed for the ECB to hike again.”

“The risks are that markets price out all ECB tightening before doing the same for Fed tightening. While the impact beyond the near term can still be a net positive for EUR/USD (which often responds asymmetrically stronger to the Fed), this dynamic argues against a fast return to 1.16-1.17 from here.”

“We expect rallies to start getting tired beyond 1.150-1.153 in current conditions, and forecast a return above 1.16 only late in the summer.”

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