European Central Bank (ECB) President Christine Lagarde's dovish comments have increased downside risks for the EUR/USD pair, according to ING's Francesco Pesole. Lagarde indicated that tight financial conditions are limiting the pass-through of energy costs to the broader economy and emphasized the need for a 'measured response,' citing no evidence of second-round effects. This has tempered expectations for an October ECB rate hike, with market pricing now at 9bp for the ECB and 17bp for the Federal Reserve. ING's macro team expects both central banks to wait until December for potential hikes, maintaining a baseline view for a higher EUR/USD by year-end. However, strong US data could prompt a test of the 1.1320-30 summer lows, as Lagarde's comments have removed some support from the euro [1].
On the US side, fading optimism regarding US–Iran talks and rising oil prices are reinforcing support for the Dollar. Brent crude traded near $109/bbl yesterday and is currently at $107/bbl, which has negatively impacted the bond market. Equities have absorbed some of the shock, but rapidly rising rates pose a risk to high valuations, potentially leading to significant dollar gains. Upcoming US consumer confidence data, expected to stabilize around 89, and JOLTS data will be key for Dollar direction. ING notes that stability in bonds is necessary for the Dollar to correct lower, but current oil market conditions are not encouraging, with upside risks rising again for the greenback [2].
The widening SOFR-ESTR 2yr swap spread, now beyond 155bp and approaching the 163bp maximum seen in early July, reflects the market's reaction to Lagarde's dovish tilt. The euro's resilience yesterday was notable, but any strong US economic data could further pressure the EUR/USD pair [1].
Analyst opinions from ING suggest that while both the ECB and Fed may hold off on rate hikes until December, the immediate market environment favors the Dollar due to oil price dynamics and data risks. The euro is vulnerable to further downside if US data surprises to the upside, and the Dollar stands to gain from ongoing tail risks in equities and bonds [1][2].
CONCLUSION
Lagarde's dovish comments have weakened the euro's outlook, while rising oil prices and upcoming US data are supporting the Dollar. ING expects both central banks to delay rate hikes until December, but near-term risks favor Dollar strength. Market participants should watch for US data releases and oil price movements as key drivers for EUR/USD direction.