EUR: A hawkish r-star? - ING

The European Central Bank will publish its staff revision on the neutral rate today, ING's FX analysts Francesco Pesole notes.

EUR/USD to retest the 1.044 Wednesday highs

"President Christine Lagarde said last week that r-star is 'a range that does not give a guideline or a destination' and Olli Rehn added yesterday that 'we should not constrain our freedom of action because of a theoretical concept'."

"That said, with the next couple of cuts not particularly up for debate, a lot of the action in pricing is focused on the terminal rate. The scope and timing of US tariffs would have a big say, but while markets await Trump's move on the EU, today's report is all markets will get in terms of terminal rate guidance, and we expect a euro reaction."

"Based on Rehn's comments and the fact that r-star projections are model-based (i.e. embedding significantly higher inflation than in the past), our best guess is that today's note will show a relatively high rate and send a hawkish signal. When adding downside risks for US payrolls, we favour a new leg higher in EUR/USD to retest the 1.044 Wednesday highs."