Lagarde's Dovish Comments Weaken Euro Outlook

European Central Bank (ECB) President Christine Lagarde's dovish comments have weighed on the Euro, according to Francesco Pesole at ING. Her remarks indicated that tight financial conditions are limiting the pass-through of energy costs to the broader economy and hinted at a measured response from the ECB.

Lagarde's comments widened the SOFR-ESTR spreads beyond 155bp, which is now just shy of the 163bp max width reached in early July. Pesole believes that these comments have increased downside risks for EUR/USD.

In light of Lagarde's comments, ING's baseline view is for a higher EUR/USD by year-end, with both the ECB and Fed waiting until December to hike interest rates. However, strong US data could prompt a test of the 1.1320-30 summer lows.