EUR: Cautious outlook as Lagarde avoids giving direction – ING

ECB Likely to Remain Cautious Amid Global Central Bank Uncertainty

Francesco Pesole from ING suggests that the recent mixed messages from major central banks worldwide may prompt the European Central Bank (ECB) to refrain from making any strong policy commitments, especially given its heightened sensitivity to oil price movements since 2022. With approximately 55 basis points of hawkish adjustment already priced into one-year ECB rate forecasts, ING anticipates that Eurozone rates face downside risks and expects EUR/USD could approach 1.140 by the end of the week.

Recent Central Bank Moves Increase Uncertainty for the ECB

So far this week, four major G10 central banks have delivered a range of signals that complicate the ECB’s decision-making. The Reserve Bank of Australia unexpectedly advanced a rate cut that was previously expected in May, the Bank of Canada indicated it is willing to overlook the recent uptick in inflation, the Federal Reserve left its outlook for a single additional 2026 rate cut unchanged, and the Bank of Japan adopted a cautiously hawkish stance.

ECB’s Approach Shaped by Oil and Past Inflation Shocks

The ECB has historically been influenced by oil price fluctuations, and the inflation surge of 2022 remains a fresh memory for policymakers. However, ING believes the current environment is different from 2022, making it likely that President Lagarde will opt for careful, non-committal communication, similar to the approach taken by Fed Chair Powell.

Market Expectations Heighten Dovish Risks

With markets having priced in a 55 basis point hawkish shift in one-year ECB rate expectations during March, even minor hints from the ECB could have a pronounced effect on short-term rates. ING argues that this substantial repricing increases the likelihood of a dovish outcome, as providing guidance to match current market expectations seems unlikely at this stage.

Implications for the Euro

These developments suggest potential downside for the euro. However, foreign exchange markets have become less responsive to interest rate differentials, with oil prices now playing a more dominant role. As a result, the euro did not benefit significantly from the earlier hawkish repricing and is unlikely to be heavily impacted by a dovish shift. Nevertheless, EUR/USD could return to levels near 1.140 before the week concludes.

(This article was produced with the assistance of artificial intelligence and subsequently reviewed by an editor.)