Lagarde's Dovish Comments Weaken Euro as October Hike Expectations Tumble

European Central Bank (ECB) President Christine Lagarde's dovish comments have put pressure on the euro, according to Francesco Pesole at ING. The comments led to a widening of SOFR-ESTR spreads and tempered expectations for an October ECB hike.

Lagarde stated that tight financial conditions are limiting the pass-through of energy costs to the broader economy and emphasized the need for a 'measured response' from the ECB, given no evidence of second-round effects. Her remarks suggest that if any central bank hikes in October, it will be the Federal Reserve (Fed), not the ECB.

Current pricing indicates an 17bp probability of an October hike by the Fed and a 9bp chance for the ECB. ING's macro team believes both central banks will wait until December to raise rates, which could lead to a higher EUR/USD by year-end.