ECB: Energy path keeps outlook uncertain – ING

ING strategists Michiel Tukker and Benjamin Schroeder say Euro rates remain highly sensitive to energy dynamics, with European Central Bank hikes still priced for 2026. They argue that lower energy prices would likely remove ECB hike expectations and pull 2Y rates down, while higher-for-longer energy costs could initially lift the euro swap curve but ultimately drag longer-dated rates lower.

Energy scenarios drive ECB and curve

"Our outlook for rates from here depends on the path of energy prices. A further drop in energy prices should price out the chance of ECB hikes, pulling 2Y rates lower again. An improvement in risk sentiment could mean that 10Y rates remain sticky at current levels."

"If, on the other hand, energy prices stay higher for longer, the picture turns more complex, and much will depend on the growth outlook. A tail risk scenario whereby energy prices rise materially from here and stay high for many months could see the ECB forced to hike rates. The immediate effect of higher inflation and policy rates would push up the euro swap curve."

"But the risk is that the growth outlook turns more negative due to higher energy costs and tighter monetary policy. In response, markets could actually start pricing in significantly looser monetary policy after the initial inflation shock. Alongside deteriorating market risk sentiment, such a scenario would bring down longer-dated rates materially."

"Markets are welcoming the thought of the Middle East conflict ending soon, but oil prices tell us that we’re not there yet. We still have European Central Bank hikes priced in for 2026, and whilst equities made a push higher, the VIX continues to point towards fragile risk sentiment."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)