Our latest views on the major central banks
At a Glance
Per the full note source, ING expects the Fed to skip a hike and cut in mid-to-late 2027, forecasting a neutral rate of 3.25%. The ECB's June hike is questioned given falling oil prices. The market may be overpricing Fed tightening, creating a dovish skew for USD.
Key Takeaways
- 01ING sees no Fed hike this year despite hawkish dots, citing disinflationary trends.
- 02Fed cuts are expected only in mid-to-late 2027, with a terminal neutral rate of 3.25%.
- 03ECB's June hike is viewed as potentially premature given falling oil prices.
- 04Market pricing of Fed tightening may be excessive, favoring USD downside over time.
Full Analysis
What the desk is arguing
Per the full note source, ING argues the Fed will maintain a lengthy pause despite the hawkish June FOMC projection of one hike this year. The desk emphasizes that nine members did not support a hike and cites falling oil prices, slowing shelter inflation (35% CPI weight), and a lackluster jobs market as disinflationary forces that will prevent further tightening.
Supporting evidence includes a sharp decline in oil prices from peaks, stagnant home prices, and outright rent falls in some areas. Tariff refunds from 'Liberation Day' IEEPA duties will further reduce corporate costs. The desk expects the first cut in mid-to-late 2027, bringing rates to a neutral 3.25%.
For the ECB, the desk questions the necessity of the June hike given the drop in oil prices, suggesting a potential pause ahead. The Bank of England is also discussed, though details are truncated in the excerpt.
Market Implications
The dovish Fed call relative to market pricing suggests USD downside potential. Focus on EUR/USD for ECB-Fed policy divergence and USD/JPY for rate spread dynamics. A break below 1.0650 in EUR/USD would challenge this view.
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Articles Our latest views on the major central banks Published 11:09 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Our take on what could be next for the Federal Reserve, the European Central Bank and the Bank of England over the comi
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4 itemsRates Spark: Oil still key to ECB outlook
The desk interprets recent commentary on the ECB as underscoring the critical dependency of future rate hikes on oil prices. With the ECB's latest 25bp hike falling short of market expectations for a more assertive rate path, lower oil prices are seen as a significant dovish influence. Per the full note from ing-think, if oil prices exceed $100 per barrel for an extended period, we could witness multiple rate hikes, with some analysts projecting up to three. However, an unclear outlook on inflation and geopolitical tensions remains pertinent as potential hazards to this forecast.
Rates: Dealing with the rate hike narrative
The desk posits that while the market may be pricing in aggressive rate hikes, a more moderate approach is warranted based on the current rate hike narrative. Per the full note by Padhraic Garvey at ING, the desk suggests that even though hikes may not fully materialize, the anticipation and positioning toward the hikes will drive market dynamics. This perspective is especially relevant for the EUR/USD pair, where it appears the market is leaning towards a 25 basis point hike from the ECB, pushing the deposit rate toward 2.75% over the next year, despite skepticism about the delivery of all projected hikes. With the current EUR/USD trading at 1.1679 and firm targets indicating a December consensus around 1.2000, there is room for volatility in response to ECB messaging and the rate environment.