The recent rally in EUR/USD has been driven by a combination of a weak dollar environment and a slight improvement in growth sentiment in the eurozone. But, when looking at EUR/USD moves in the second half of 2022, it’s hard to isolate a clear and direct impact of ECB policy/rate expectations; we have long highlighted how our quantitative tools show a very small beta of the EUR-USD short-term swaprate differential to EUR/USD. Recently, this relationship has modestly restrengthened, but in our view, this mostly reflects the positive impact of easing Federal Reserve hike expectations on global sentiment (to which EUR/USD is highly sensitive) rather than a direct impact on the pair. All of this means that the implications of this ECB meeting on the euro may not prove very long-lasting, and global market factors - like risk sentiment and energy prices - should move back into the driving seat quite rapidly. Still, while the reaction to the latest ECB announcement has been rather contained in the FX market, we could see stronger volatility in EUR/USD on this occasion as markets could receive some guidance on quantitative tightening and new projections will be released at the same time. Given growing speculation around a 75bp hike, we could see a small negative reaction in EUR/USD should our 50bp call prove correct. However, the downside should be limited if the ECB offers some hawkish guidance on QT. - ING Strategy
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