EUR: Negotiated wages not that key for the ECB - ING

The German election rally in the euro did not last long, as markets were not pricing in a political risk premium before the vote and the key downside risks to the euro remain intact, ING's FX analyst Francesco Pesole notes.

EUR/USD can retest 1.050 on the back of USD weakness today

"Chancellor-in-waiting Friedrich Merz is reportedly discussing a quick agreement on EUR 200bn defence spending with its likely coalition partner SPD, following his remarks about Europe's need to gain independence from the US. Our view is that defence spending will not be seen by markets as a channel to revamp stagnant growth in the eurozone and should therefore have limited positive impact on the euro."

"The ECB publishes its indicator of the euro area negotiated wages for 4Q24. In 3Q24, the index jumped to 5.4% YoY, although that was primarily due to one-off payments, and ultimately not particularly taken into consideration by the ECB. The Bank's target is around 3%, and while it may take longer for such a slowdown to show in the negotiated wage series, the ECB is seemingly welcoming the slower wage growth in other higher-frequency indicators."

"We think the bar is relatively high for the ECB to change its stance on the back of today's negotiated wage data, and any positive reaction from the euro may be unwound once the ECB reiterates its dovish commitment. EUR/USD could retest 1.050 on the back of some USD weakness today. Still, our view remains bearish on the pair and we target a return to 1.030 in the near term."