ING’s Chris Turner expects the euro to stay in narrow ranges ahead of Thursday’s European Central Bank (ECB) meeting. The focus is on how the ECB communicates its policy stance rather than an immediate change in rates.
The ECB is not expected to raise rates at this meeting, but it is still expected to keep the option of a future increase open. This is linked to oil-driven inflation pressures and rising concerns about weaker growth alongside higher prices.
Oil Driven Inflation Expectations
Oil prices are sustaining elevated inflation expectations in the eurozone. Two-year euro inflation expectations, based on inflation swaps, remain above 2.80%.
ING expects the ECB to warn that a June rate rise remains possible. It says such messaging could help keep EUR/USD supported near 1.1700 during the week.
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We remember the oil-driven stagflationary shock back in 2025, where the European Central Bank had to talk tough just to keep the Euro supported. A strong warning of a rate hike was the only thing holding EUR/USD near 1.1700. The market was watching for any sign of weakness from the central bank.
Current Setup Into The Next Ecb Meeting
Today, the situation has evolved as we approach the next ECB meeting. Eurozone inflation has cooled significantly, with the latest Harmonised Index of Consumer Prices (HICP) reading at 2.4%, a stark contrast to the high expectations we saw last year. With Brent crude hovering around a more stable $88 a barrel, the immediate energy price shock has subsided for now.
This suggests that implied volatility on EUR/USD options may be lower than in the past, reflecting reduced uncertainty about sudden rate hikes. Traders could consider strategies that benefit from a more predictable ECB, expecting the central bank to hold rates steady through the summer. The EUR/USD is currently trading near 1.0850, a level that does not demand the same aggressive verbal intervention from policymakers as we saw in 2025.
The key risk now is not an unexpected hike but the timing of the first rate cut, which markets are pricing in for the late third quarter. Two-year EUR inflation swaps are down to 2.35%, showing the market believes the inflation fight is largely over. Any communication that pushes back on these rate cut expectations could cause a short-term repricing in front-end interest rate futures and a pop in the Euro.
