ING’s Francesco Pesole highlights that the EUR/USD price action following the US jobs report highlights the lack of a powerful growth narrative for the euro as markets doubt further ECB rate hikes. Softer inflation and low oil prices are dampening expectations. ING warns that markets may be pricing in a tightening of ECB monetary policy before the Fed tightens monetary policy and expects EUR/USD gains to moderate above 1.150-1.153, with a rise above 1.16 only occurring later in the summer.

Limited growth as ECB doubts grow

“The EUR/USD price action in the hours after the US jobs report highlighted the lack of a compelling bullish narrative for the euro. This largely explains the fact that markets are starting to doubt whether the ECB will raise the price again after all, with September valuations at 11bps and year-end valuations at 17bps.”

“While ECB presidents have generally tried to maintain a hawkish tone, President Christine Lagarde and others have acknowledged that the policy response may not need to be as aggressive from here on out. This week’s lower-than-expected June CPI and persistently low oil prices mean some second-round effects on core inflation may be needed for another ECB rate hike.”

“The risk is that markets price in all ECB tightening before they do the same in the event of a Fed tightening. While the longer-term impact may still be net positive for EUR/USD (which often reacts asymmetrically more strongly to the Fed), these dynamics argue against a quick return to 1.16-1.17 from here.”

“We expect rallies to begin to tire above 1.150-1.153 in current conditions, and we only forecast a return above 1.16 in late summer.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)