THINK Ahead: We’re forecasting fewer rate hikes than markets. Could we be wrong?
The desk is suggesting a more cautious outlook on future rate hikes from the European Central Bank (ECB) than currently priced by the market. As articulated in the commentary, ING's James Smith expresses skepticism regarding the sustainability of inflation pressures despite recent hawkish signals from the ECB, which have seen two-year swap rates jump following their latest meeting. With a market consensus seemingly anchored on additional hikes, including a potential October increase, the desk stresses that inflation's trajectory may not justify this aggressive path. Per the full note , ING’s forecast diverges from market expectations by anticipating fewer hikes amidst uncertainty about inflation shocks and the neutral rate stabilization.
What the desk is arguing
The desk believes that the market may be overestimating the pace and scale of future rate hikes from the ECB. As outlined by ING, the recent surge in market expectations following the ECB's hawkish stance might be premature given the mixed signals in inflation metrics and economic conditions.
While markets are pricing in multiple rate hikes, including heightened expectations post-ECB meeting, ING posits that much of this inflationary pressure could be overstated or delayed. Notably, President Lagarde's remarks about persistent inflation contrast with softer food and energy price indicators, supporting the desk's cautious viewpoint.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Aligned firms include: - jpmorgan: target 1.10 (Mar26) - bofa: target 1.04 (Mar26)
This call aligns with jpmorgan but stands at the upper bound of the range, suggesting a cautious approach towards currency movements given potential ECB dynamics.
How other firms see it
Firms like jpmorgan appear to resonate with our cautious outlook, while bofa maintains a more bearish stance on EUR/USD amidst anticipated economic headwinds. Such divergent views underscore the uncertainty in currency impacts as central banks reassess inflation pressures and rate strategies.
Look at the interplay between the EUR/USD trajectory and upcoming ECB meetings, as they may influence trader sentiment and volatility in the currency pairs in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The desk is skeptical about multiple future rate hikes from the ECB, diverging from current market consensus.
- 02The recent market uptick in rate expectations was fueled by signals from the ECB, particularly from President Lagarde.
- 03ING posits that inflation shocks may be delayed, contradicting the hawkish sentiment driving market rates.
- 04Key firms like **jpmorgan** align with our cautious stance, while others like **bofa** maintain a bearish outlook.
Market implications
Traders should focus on the EUR/USD level around 1.075 as a critical pivot point, especially in the light of shifting central bank communications. The upcoming ECB meetings could serve as vital indicators of future rate intentions, and the market's response could provide insight into potential trend reversals or affirmations.
Risks to this view
A significant reversal could be triggered if inflation data surprises to the upside, forcing the ECB to adopt a more aggressive rate-hiking stance than anticipated. Additionally, any reassurances from central bank officials or stronger-than-expected economic indicators might lead to a realignment of market expectations.
Opinions Opinion by James Smith THINK Ahead: We’re forecasting fewer rate hikes than markets. Could we be wrong? Published 14:40 After this week's hawkish antics at the ECB, markets are pricing in loads more rate hikes, with no cuts in sight.
At ING, we're not convinced. James Smith argues that it all comes down to whether the inflation shock has simply been delayed, and whether the neutral rate is genuinely on the rise Markets are increasingly pricing in further rate hikes from major central banks How markets could be right – and us wrong – about central banks It takes a lot for a central bank to deliver a hawkish surprise these days. Yet the ECB managed exactly that this week.
Two-year swap rates, a gauge of rate hike expectations, rose sharply following Thursday's meeting, helped along by the continued grind higher in energy prices. I'll confess, this surprised me. With markets already pricing another two rate hikes beyond September, it felt odd that the ECB would risk adding fuel to the fire.
But President Christine Lagarde had plenty of opportunities to gently push back on market pricing and didn't take them. The fact that the ECB explicitly left the door open to an October hike in its now-notorious post-meeting leak felt particularly telling. There are good reasons to be sceptical, as Carsten explained in his post-meeting write-up .
For one thing, Lagarde's assertion that inflation will be "longer lasting" than previously expected stands in sharp contrast to what both the inflation figures and corporate pricing surveys are telling us. Still, it pays to be open-minded. And it has prompted me to think about how we at ING could be wrong, not just about the ECB, but central banks across the board.
The first possibility is that the inflation shock is simply delayed. Food inflation and other energy-sensitive parts of the basket have so far proven more benign than feared. But most models suggest the full impact of an energy shock takes at least 12 months, often closer to 18, to come through.
And with the scars of 2022 still fresh, perhaps businesses were simply better prepared this time. Think about Europe’s airlines, which entered this crisis well hedged, or European fertiliser inventories, boosted by stockpiling ahead of last year's carbon border tax changes. But these buffers don’t last forever.
Margin pressure will surely grow. There's little sign of broader inflationary pressures in Europe – yet Source: Macrobond, ING "> Source: Macrobond, ING Then there are the surveys. A few years back, I vaguely recall someone at the Bank of England bemoaning the fact that firms were saying one thing about their pricing plans then doing something else entirely.
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