Currency analysts at ING do not expect this Thursday’s ECB statement to be strong enough to provide sustained support for the euro, especially given the underlying pressures.

According to the bank, “we do not expect the ECB to deliver a sufficiently hawkish statement to offset the unfavorable external environment and euro valuation.”

Looking at the euro/dollar (EUR/USD) exchange rate, the bank adds: “we expect the pair to trade in the 1.05-1.10 range over the summer months.”

Huge uncertainty complicates the response to a surge in inflation

Given the high degree of uncertainty, ING expects the ECB to be unable to make a definite policy decision this week.

“There is simply too little hard data yet on the macroeconomic impact of the war in Ukraine. And there is simply too much uncertainty about how the war will develop. Staying put and continuing with the announced reduction in net asset purchases looks like the only viable option at the moment.”

Nevertheless, the bank will be under pressure from very high inflation, and there will inevitably be strong demands from hawkish members to be more aggressive and proactive in fighting inflation.

In this context, the bank will have to say something to assuage the fears of the committee members.”

According to ING, “President Christine Lagarde may have to add some color regarding different scenarios for future policy or even reduce the range of possibilities to fewer options.”

Money markets have priced in a policy tightening of 70 basis points by the end of 2022, and ING believes the risks are skewed towards a slightly dovish surprise compared to market expectations.

The euro’s fundamentals remain vulnerable

ING believes the euro is broadly vulnerable due to aggressive Fed rate hike revisions, further EU sanctions against Russia targeting energy and uncertainty around the French elections.

From a currency market perspective, the bank adds, “this means that the ECB may not come to the euro’s rescue”.