**The euro faces sustained pressure toward $1.14 despite the European Central Bank's expected quarter-point rate hike this week, as a resurgent dollar and rising energy costs offset hawkish policy signals.
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ECB's hawkish hike may not stem euro's slide toward $1.14, ING says
The euro faces sustained pressure toward $1.14 despite the European Central Bank's expected quarter-point rate hike this week, as a resurgent dollar and rising energy costs offset hawkish policy signals.
The euro's slide toward $1.14 is set to persist even after the European Central Bank delivers a quarter-point rate hike to 2.25% on Thursday, as dollar strength and rising energy costs overwhelm hawkish policy signals, according to ING Groep NV.
"EUR/USD was hit hard on Friday as the dollar surged across the board, increasing pressure on the ECB to sound hawkish this Thursday," said Chris Turner, global head of markets at ING. "A hawkish-sounding ECB is our call, and one which will maintain the view that it will hike again in September."
The euro has already weakened sharply as the dollar index rallied to a two-month high, fueled by stronger-than-expected US data. The May ADP employment change rose 122,000, the ISM services index climbed to 54.5, and April factory orders surged 4.8% month over month — all exceeding consensus estimates. The 10-year Treasury yield rose 4.6 basis points to 4.489% Wednesday, while WTI crude jumped more than 2% to a 1.5-week high after US forces intercepted Iranian missiles, reigniting inflation concerns.
The ECB's deposit rate currently stands at 2% after a cumulative 150 basis points of tightening since July 2024. Markets price a 98% probability of Thursday's 25-basis-point increase, with swaps also discounting a follow-up move in September. But Turner warned that deteriorating eurozone manufacturing data and rising energy prices will keep EUR/USD offered, with the 1.14-to-1.15 region representing the likely summer floor. "It will remain pressured while the market explores the idea of a Fed tightening cycle," he said.
The divergence between the Federal Reserve and the ECB is widening as the US economy shows surprising resilience more than 100 days after the Gulf conflict disrupted global energy markets. The Fed's Beige Book published Wednesday reported rising inflation pressures across most of the 12 districts, while New York Fed President John Williams said monetary policy is "exactly in the right place" and he sees no need to adjust rates now. The fed funds rate has been held at 5.25% to 5.5% since July 2023, and the market currently discounts only a 3% probability of a 25-basis-point hike at the June 16-17 FOMC meeting.
For the eurozone, the headwinds are mounting from multiple directions. German factory orders for April, released Monday, already showed weakness, and ING warned that manufacturing activity data may now start to deteriorate after companies front-loaded inventory builds earlier this year during Gulf conflict uncertainty. The eurozone composite PMI was revised up to 48.5 in May, still in contraction territory, while producer prices rose 4.9% year over year — the fastest pace in more than three years.
The ECB's challenge is to sound sufficiently hawkish to support the euro without triggering a recession by tightening into weakening growth. The last time the ECB faced a similar dilemma was in 2023, when it continued hiking through a manufacturing downturn, ultimately pushing the eurozone to the brink of recession before pausing in September of that year.
This article is for informational purposes only and does not constitute investment advice.
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