06:08 AM EDT, 10/08/2024 (MT Newswires) -- Financial markets have almost fully priced in a European Central Bank rate cut next week, but ING says the decision may be much closer than the rates market suggests.

The ECB already incorporated weaker growth and inflation below 2% in its latest projections, and while last week's speech by Isabel Schnabel, a hawk on the executive board, focused on growth downside risks, she also noted that monetary policy can do little to ease those risks, wrote the bank in a note.

"Single-country data keeps pointing to sticky services inflation, and the recent oil price rise means a potential revision higher in the inflation forecasts at the next round of staff projections," stated ING.

Markets are aware of these factors, but are equally focused on the dovish comments by ECB members like Francois Villeroy de Galhau and probably also the view that they can push the ECB into a cut by pricing it in fully on next week's policy meeting day, pointed out the bank. There is an ECB meeting chaired by Schnabel on Tuesday, and ING will be interested to see whether she wishes to clarify her stance.

A hawkish re-tuning on Schnabel's side can send EUR/USD back above 1.10, but the bank isn't sure markets will be giving up on an October cut very easily and the wide USD:EUR rate gap still points to some pressure on EUR/USD in the near term.

Although the market has priced out a lot of the easing from the central bank of the Czech Republic (CNB) over the past two weeks, the terminal rate priced in is around 3.00-3.25%, according to ING. This is close to the bank's forecast but ING still thinks a pause in the cutting cycle would be a negative surprise for the rates market but positive for the koruna (CZK) despite the weak economic data.

The koruna has so far proven to be the most resilient currency in the current sell-off in the Central and Eastern European and Emerging Markets space and ING believes EUR/CZK will return to 25.00 once global markets calm down. In addition, should the CNB confirm this hawkish approach, the CZK could see significant support.