Markets are focused on whether the European Central Bank’s (ECB) recent hawkish shift is confirmed by updated forecasts and rhetoric, with inflation projections the main risk and scope for a short-term dip in EUR/USD despite supportive year-end option dynamics, ING's FX analyst Chris Turner notes.

EUR/USD vulnerable to near-term pullback

"Today's ECB meeting will take canter stage in FX markets. After a hawkish turn last week, investors will be looking to see whether that gets backed up with forecast and rhetoric changes today. Examining those forecasts, the CPI profile is likely the biggest risk to the euro. In September, the ECB's forecasts for headline and core inflation were: 2026, 1.7/1.9, and 2027, 1.8/1.9."

"The delay in the ETS2 carbon tax could wipe 0.2% off the 2027 headline forecast and a new 2028 CPI forecast somewhere near 1.8% could prove awkward for ECB President Christine Lagarde as she has to explain away an inflation undershoot. There will also be a focus on the growth forecasts: 25/26/27 at 1.2/1.0/1.3 and perhaps some modest upward revisions."

"The above could see the short-end of the euro interest rate curve handing back some of the rise in yields seen last week. And that could prompt a brief sell-off in EUR/USD to the 1.1680/1700 area. However, as we mentioned yesterday, there are some large EUR/USD option strikes rolling off in the 1.1750/1800 area over the coming days, which could have an influence on thinning year-end markets."