Francesco Pesole emphasizes that the ECB’s careful communication conceals a hawkish pivot, as officials are said to be contemplating an April rate increase should inflation exceed expectations. Current market conditions reflect expectations for earlier tightening and increased probabilities of consecutive rate adjustments. Economists anticipates a heightened upside potential for the Euro, suggesting that EUR/USD could aim for 1.170 if geopolitical tensions diminish and there are no further disruptions in gas supply. “The ECB adopted a careful approach given the fluctuations in energy prices yesterday; however, President Christine Lagarde’s press conference carried a more aggressive tone as she expressed increased worry about potential upward pressures on inflation.”
However, it is crucial to note that ECB officials are contemplating a rate increase in April if inflation exceeds the target significantly. Introducing April into the discussion (currently reflecting a 15bp expectation) suggests that the ECB might be poised to take decisive and proactive measures, thereby intuitively enhancing the likelihood of consecutive rate hikes. Economists are not prepared to forecast a rate hike at this time, as a favorable shift in the war and energy prices may still deter the hawkish sentiment. However, the likelihood of an increase has certainly risen, which enhances the potential for the euro beyond the immediate effects of energy prices.
Further EUR gains from this point are contingent upon the absence of any significant disruptions to gas supply.We believe that exercising caution is essential in EUR/USD at this time, as the pair appears to be trading somewhat robustly in light of current oil and gas price levels. However, if we observe any signs of de-escalation over the weekend, EUR/USD may target 1.170 shortly, supported by a hawkish message from the ECB.