ING strategist Francesco Pesole highlights that aggressive repricing of European Central Bank tightening, with three hikes now fully priced, may have gone too far. While EUR/USD has been supported by hawkish ECB news, he warns that elevated Oil prices, fragile risk sentiment and already stretched rate expectations leave the pair vulnerable to a downside correction back toward pre‑meeting levels.

Hawkish ECB pricing faces downside risks

"Watching central bank speakers may be even more important for the European Central Bank than for the Fed this week. Thursday’s report that the ECB is considering an April hike has caused a major repricing in EUR swaps, which now attach an 80% probability to April, with three hikes fully priced in by year-end."

"It still seems too hawkish to us, but we admit last week’s messaging was clearly hawkish and when a central bank tightens, it often delivers no fewer than two hikes. The longer oil prices remain at these elevated levels, the more realistic those hikes will be."

"However, given the size of the hawkish repricing, dovish comments can cause significant adjustments in front-end euro rates. Today, we’ll hear from a dove (Piero Cipollone) as well as Chief Economist Philip Lane. President Christine Lagarde is due to deliver remarks on Wednesday and there are plenty of other speakers to watch."

"On the data side, PMI and Ifo surveys will be the highlight this week. Consensus is for a moderate decline in both, but considering the size of the ZEW drop, risks are on the downside."

"EUR/USD has received support on hawkish ECB news, but with oil prices this elevated, risk sentiment unstable and markets already pricing in three ECB hikes, the risks look skewed to the downside. A correction to pre-ECB meeting 1.145 levels would confirm the FX market is not finding a sustainable anchor in the now tighter rate differentials."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)