Euro-Dollar: ECB "Insurance Hike" Coming in June says ING
- Written by: Gary Howes
Above: File photo of ECB President Christine Lagarde. Photo by Dirk Claus/ECB.
Rising Eurozone interest rates relative to the U.S. should underpin the euro-dollar exchange rate.
The European Central Bank (ECB) won't raise interest rates next week, but should do so in June, according to a new analysis.
"We now see the ECB announcing at least one insurance rate hike," says Carsten Brzeski, Global Head of Macro at ING Bank, explaining that the June meeting is the most likely contender.
With the U.S. Federal Reserve expected to remain in hold, monetary policy looks set to play out in a supportive manner for the euro versus the dollar.
"The ECB hiking into a crisis could be bad for the EUR. But if they are hiking because oil is higher-for-longer, labour markets are tight, equities are ripping, and life is okay, That's bullish EUR," says Brent Donnelly, analyst at Spectra Markets.
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The exchange rate has risen from lows close to 1.14 in March back to the mid-1.17s at the time of writing, but some analysts say divergent monetary policy paths can lift euro-dollar to above 1.20 - or higher - in the coming months.
ECB governing council members have been vocal about the direction of interest rates recently, with most acknowledging there's no case for a rate cut in April.
However, beyond April, optionality is the word, and with inflation expected higher, rate hikes will come into the conversation.
Expect council members to say next week that they continue to await data in the wake of the Middle East crisis. However, the ECB will inevitably have to rekcon with rising prices.
"We think the ECB – like us – is expecting an initial inflation wave, starting with gasoline prices, followed by knock-on effects on transportation costs, food prices and other industrial products. As long as this remains a single, time‑limited wave, there is no need for ECB rate hikes," says Brzeski.
However, he adds there are three potential pain points remain for the ECB:
- A psychological one: Headline inflation above 4%, reviving uncomfortable memories of 2022
- An analytical one: Core inflation above 3%, signalling broader price pressures
- A credibility one: A surge in survey‑based inflation expectations which would make inaction increasingly difficult to justify
It's those three "pain points" that make at least one "insurance hike" necessary.
