Markets are virtually fully pricing in an ECB rate cut next week (23bp), but our economics team discusses here how the decision may well be much closer than the rates market suggests, ING’s FX analyst Francesco Pesole.

Data keeps pointing to sticky services inflation

“That’s because the ECB already incorporated weaker growth and inflation below 2% in its latest projections, and while Isabel Schnabel’s latest speech focused on growth downside risks, she also remarked how monetary policy could do little to ease those risks. Incidentally, single-country data keeps pointing to sticky services inflation, and the recent oil price rise means a potential revision higher in the inflation forecasts at the next round of staff projections.”

“Markets are hardly ignorant of these factors, but are equally hanging on to dovish comments by ECB members like Villeroy and probably also the view that they can push the ECB into a cut by pricing it in fully on meeting’s day. There is an ECB meeting chaired by Isabel Schnabel today, and we’ll be interested to see whether she wishes to clarify her stance.”

“A hawkish re-tuning on her side can send EUR/USD back above 1.10, but we are not sure markets will be giving up on an October cut very easily and the wide USD:EUR rate gap still points to some pressure on EUR/USD in the near term.”