ING THINK
Loading…
FX BANK FORECAST · COVERAGE
Institutional FX coverage in your inbox
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
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.
Key takeaways
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.
Risks to this view
An escalation in Middle East tensions could spike oil prices, reviving inflation fears and forcing a Fed hike. A resilient US jobs market with sustained wage growth could also delay cuts. The view fails if the ECB signals further tightening amid sticky core inflation.
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 coming months James Knightley , Carsten Brzeski and James Smith Global monetary policy remains the key driver of interest-rate expectations as investors reassess the outlook for the Federal Reserve, European Central Bank and Bank of England Federal Reserve A more hawkish-than-anticipated June FOMC meeting fuelled market expectations for a Federal Reserve rate hike this year. But oil prices are down sharply from their peaks (despite this week's uptick) and if renewed tensions in the Middle East do not escalate further, the inflation backdrop should improve markedly over the coming months. Slowing shelter inflation, which has a 35% weighting within the consumer price index, should also help lower the headline rate given stagnant home prices and private sector surveys reporting outright rent falls in a growing number of areas.
The lacklustre jobs market means wage pressures are subdued, while the one-off step increase in costs caused by tariffs will start to drop out of the annual inflation calculation through the second half of this year. Refunds of the “Liberation Day” IEEPA tariffs will further help lower corporate costs. While in June, nine FOMC members felt they would need to raise interest rates this year, it is important to remember that nine others did not.
We agree with that second group. A lack of vigour in the jobs market and the prospect of lower inflation means a lengthy pause is our call before eventual rate cuts in mid to late 2027 bring the policy rate down to a neutral level of around 3.25%. European Central Bank The drop in oil prices in June may have led some ECB officials to question whether the June rate hike was really necessary.
Historically, it is rare for the ECB to embark on a new tightening cycle ahead of other major central banks. It would be a bittersweet irony if this display of global leadership were eventually judged to have been a mistake. However, the recent rebound in oil prices amid renewed Middle East tensions serves as a reminder that the inflation outlook remains far from settled.
At the ECB conference in Sintra, President Christine Lagarde reiterated that the June hike was not an insurance move. Rather, it reflected an outlook of persistently elevated headline and core inflation, with ECB forecasts showing headline inflation above 2% in both 2027 and 2028 and core inflation at 2.7% in early 2027. The decline in energy prices seen in June increased the likelihood that future forecasts could show headline inflation falling below 2% in 2027.
Would such a scenario prevent the ECB from delivering a second rate hike this summer? Judging from Lagarde's recent remarks, as well as those of other policymakers, the answer appears to be no. In fact, the ECB still looks set to hike again.
As long as core inflation forecasts are not revised materially lower, there appears to be little standing in the way of another rate hike. Whether a second increase is really what the eurozone economy needs remains a different story. Bank of England With oil prices down from earlier peaks, a Bank of England rate hike now looks highly unlikely.
Financial markets are still pricing a single rate rise over the next 12 months. But inflation is now unlikely to go much above 3% this summer and is likely to be much closer to 2% by next summer. That’s helped by ever-lower wage growth – now at 2.9% in the private sector, down from over 6% 18 months ago, and biased even lower in the short-term.
That goes hand in hand with further weakness in the jobs market. That all points to rate cuts in 2027 – something markets aren’t currently pricing. But a lot depends on the politics and what Makerfield MP Andy Burnham – who is highly likely to become prime minister this month – opts for at the Autumn Budget.
For now, we expect two cuts in 2027, in 2Q and 4Q. Federal Reserve European Central Bank Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors James Knightley Chief International Economist James Knightley is the Chief International Economist in New York. He joined the firm in 1998 in London and has been covering G7 and Western European economies. He studied economics at Durham… Carsten Brzeski Global Head of Macro Carsten Brzeski is the Global Head of Macro for ING Research.
Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow… James Smith Developed Markets Economist James is a developed market economist, responsible for ING's view on the UK economy and Bank of England. He graduated from the University of Bath with a degree in economics and joined ING in 2015.
In this article Federal Reserve European Central Bank Bank of England
How we cover this story
Live cross-firm bank consensus across 30 desks — FX, oil & gold
View bank forecasts