ING: The EUR - FJElite

The euro held up relatively well yesterday considering the slew of dovish-leaning comments by ECB President Lagarde, which favoured a widening in the SOFR-ESTR 2yr swap to beyond 155bp. We are now not far from the 163bp max width reached in early July.

Lagarde seemed willing to tone down some market enthusiasm about an October hike yesterday, saying that tight financial conditions are limiting the pass-through of energy costs to the broader economy. She also stressed that the ECB should adopt a “measured response” given no evidence of second-round effects.

Her remarks confirm our suspicion that if one central bank hikes in October, it will be the Fed, and not the ECB. Pricing is now 17bp and 9bp, respectively. Our macro team thinks both will wait until December, hence our baseline view for a higher EUR/USD by year-end. But any hint of strong US data could prompt a test of the 1.1320-30 summer lows, with Lagarde's comments lifting some support off the euro.