Three scenarios for how the ECB could normalise monetary policy and its implications for EUR/USD – ING

EUR/USD is being driven by developments at the short end of the interest rates curves and clearly the speed with which the European Central Bank (ECB) normalises policy will be important. Here are three possible scenarios on the ECB’s path to normalisation and its implications for the EUR/USD pair, according to economists at ING.

Base case

“The ECB ends net asset purchases in the second quarter of 2022 and starts hiking interest rates by 25bp in September with another 25bp in December. We expect only two additional rate hikes, bringing the refi rate to 1.0% by the end of 2023, with no further hikes in 2024. Given the fact that the market virtually prices three 25bp hikes from the ECB this year – we look for EUR/USD to trace out a 1.05-1.10 range, ending the year at 1.10. In 2023, the emergence of Fed easing expectations could see the dollar turn around and EUR/USD end the year at 1.15.”

Earlier and more aggressive normalisation

“The ECB ends net asset purchases in June and hikes interest rates by 25bp in July with another 25bp in September. The ECB follows in the Fed’s footsteps, hikes rates by 25bp in December 2022, March, June and December 2023 with another 50bp in 2024, bringing the refi rate to 2%. Multi-year ECB tightening cycle would probably mean more for 2023 than 2022 EUR/USD forecasts. The pair could be trading at 1.20-25 by end-2023 here.”

The fear is back move

“The ECB still sticks to normalisation, hikes rates by 25bp in September and December but delivers no further rate hikes. The more subdued ECB scenario would probably have more impact on EUR/USD this year and could see EUR/USD pinned down near 1.05.”