ING’s Francesco Pesole highlights that EUR/USD has slipped back below 1.16 despite firm risk sentiment, as earlier gains on the European Central Bank’s (ECB) surprise hawkishness are partly unwound. Markets have reduced pricing for an April ECB hike, closely tracking Oil moves. Pesole warns that absent tangible Gulf de-escalation, the recent EUR/USD rally looks fragile and a return below 1.1500 is likely.

ECB repricing weighs on EUR/USD

"EUR/USD eased back below 1.16 yesterday despite good risk sentiment, which could be mirroring some profit-taking on the de-escalation trade. At the same time, EUR/USD did jump on the ECB's surprise hawkishness last week, and may be giving up some of those gains as the dovish repricing in ECB expectations proves steeper than for the Fed when oil prices decline."

"Markets have notably scaled back expectations for an April ECB hike, which was priced at a peak 22bp on Monday and is now at 17bp after having fallen to 14bp – closely tracking oil prices."

"Yesterday, ECB President Christine Lagarde said the central bank wouldn't be paralysed by hesitation, but we also heard some slight dissent from dovish member Villeroy, who stressed it's too early to discuss the timing of hikes."

"Any extra day without tangible de-escalation in the Gulf dents the sustainability of the latest EURUSD rally and argues for a return below 1.1500. No key data to watch in the eurozone today, but the ECB’s Guindos and Muller are due to speak."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)