Rates Spark: Bracing for a hawkish ECB
The European Central Bank (ECB) is poised for a 25 basis point rate hike today, supported by a hawkish narrative that suggests limited potential for additional aggressive moves. Per the full note from ing-think, expectations are tempered as the market already prices in three hikes, which may represent an overextension of hawkish sentiment, given that inflation pressures have not yet shown second-round effects. The recent ECB commentary implies that while a hawkish tone will be maintained, any surprises beyond today's hike are off the table unless inflation data signals otherwise.
What the desk is arguing
The desk believes the ECB hike strategy will remain cautious despite expectations for a 25bp increase, framed by a hawkish narrative without an aggressive forward guidance for subsequent hikes. This view aligns with insights from the ing-think report, noting that recent pricing suggests a high probability of three rate hikes but lacks room for further hawkish surprises.
Recent market behavior indicates persistent inflation expectations, as evidenced by long-term swap rates remaining well anchored. With recession risks largely dismissed, the desk suggests ECB President Lagarde will adopt a tightrope approach—acknowledging the need for hikes while avoiding overly dovish tones.
Where it sits in our coverage
Our current consensus target for GBP/USD is 1.3330, with a range suggesting potential movement up to 1.3800 over the next year. Notable per-firm targets include commerzbank at 1.4020 and barclays at 1.4100 by December 2026.
This view aligns closely with the majority of the market consensus, suggesting that the room for GBP appreciation is limited in the face of ECB policy. As one of the higher targets, the desk's forecast remains confident but acknowledges the risks associated with ECB positioning.
How other firms see it
Several aligned firms, including mufg with its target of 1.3500 and rbc at 1.3600 for March 2026, appear to support a cautious bullish outlook based on the ECB's 25 bp hike. In contrast, firms like stanchart and nomura are positioned more conservatively, pricing targets below 1.3200, contending that GBP is tethered by macroeconomic uncertainties.
Watching the EUR/USD trajectory will be essential, as movements here could reflect shifts in ECB policy, impacting GBP/USD dynamics given the interconnectedness of interest rate expectations across these economies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB is expected to hike by 25bp today, framing a hawkish narrative for future decisions.
- 02Market expectations are already pricing in three rate hikes, indicating limited room for further hawkish surprises.
- 03Inflation expectations remain anchored but could shift if secondary effects start to materialize.
- 04GBP/USD targets are cautiously optimistic with the consensus reflecting a spread aiming toward 1.3800 by December 2026.
Market implications
Traders should watch for reactions in GBP/USD around the level of 1.3500, particularly if ECB commentary points toward future hikes in July. The ongoing inflation narrative could influence positioning ahead, especially if subsequent inflation data surprises markets.
Risks to this view
A dovish turn from the ECB, especially if economic data reveals significant growth risks or inflation pressures abate, could invalidate the current bullish positioning on GBP/USD. Further, a shift in global economic sentiment could derail forecasts if recessionary fears materialize.
Articles Rates Spark: Bracing for a hawkish ECB 07:25 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The European Central Bank is widely expected to hike rates by 25bp today, and we believe this is to be supported by a hawkish narrative . But the scope for markets to turn even more hawkish seems limited. Over the past few days, the curve is already increasingly set on three hikes, which seems stretched Michiel Tukker and Benjamin Schroeder The European Central Bank is widely expected to hike its main refinancing rate from 2.00% to 2.25% with a hawkish tone The bar has risen for a hawkish surprise from Lagarde We expect the ECB to hike by 25bp from 2.0% to 2.25%, supported by a hawkish tone , but the bar has risen to surprise markets.
Despite oil prices testing new lows earlier this week, the EUR curve is increasingly set on three rate hikes. A confirmation that ECB hikes are indeed happening likely feeds this narrative. Having said that, we don’t see much more upside potential in the near term.
Unless the data starts showing second-round inflation effects, we struggle to picture scenarios where more than three hikes are necessary. The hawkish market pricing gives the ECB extra time to act, which means President Lagarde doesn’t have to commit to future hikes. Opening the door to July would be part of the more hawkish outcomes.
But the curve is already pricing in a 30% probability of that happening, so the question is whether that can still go higher. Having said that, markets are clearly in a hawkish mood. Even a softer US CPI number did little to bring rates down.
A more dovish tilt would likely come from growth risks rising. But we doubt Lagarde will risk sounding too dovish. Inflation expectations as measured through long-term swaps stay well anchored, which will remain an important focus for the ECB.
As long as recession risks stay off the table, markets will be more concerned about persistent second-round inflation than growth dynamics. Too much focus on growth concerns by the ECB could change the perceived reaction function and thereby risk raising markets’ inflation expectations. Thursday’s events and market view The ECB is widely expected to hike interest rates by 25bp at Thursday’s policy meeting, which will lift the deposit facility rate to 2.25%.
The ECB will also release an updated set of economic projections, which most expect to show higher (headline) inflation forecasts for 2026 and 2027, as well as downward revisions to growth. The US will release producer price data for May as well as the weekly jobless claims data. In terms of primary market activity, Italy will auction new 3y bonds (€3.5-4bn).
The UK also auctions 3y gilts (£5bn), and the US will then auction 30y (US$22bn) bonds later in the day. Rates Daily 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 Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London. Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… Benjamin Schroeder Senior Rates Strategist Benjamin Schroeder is a senior rates strategist at ING in Amsterdam. Before joining ING in 2016, he worked in fixed income research at Dresdner Kleinwort and Commerzbank in Frankfurt, Germany.… In this article The bar has risen for a hawkish surprise from Lagarde Thursday’s events and market view
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