06:01 AM EST, 11/19/2024 (MT Newswires) -- EUR/USD is enjoying a brief correction as some of the European Central Bank hawks speculate over whether global fragmentation -- shortening of supply chains and trade wars -- will be inflationary and will call for higher interest rates, said ING.

These were the thoughts of ECB's Joachim Nagel on Monday -- comments which helped narrow the two-year EUR:USD swap differential by around 10bps and saw EUR/USD correct to 1.06, wrote the bank in a note.

On the subject of rate differentials, financial markets currently price 10bps of Fed cuts in December, while ING looks for 25bps, and 31bps of ECB cuts, while the bank looks for 50bps. If the Federal Reserve cuts 25bps and the ECB only cuts by 25bps, there could be a little upside for EUR/USD amid the seasonal US dollar patterns.

For the time being, however, ING doesn't see a compelling case for EUR/USD to correct much higher and even a move to 1.0660/65 would still be in keeping with a bearish near-term trend. The bank expects another quiet day on Tuesday for EUR/USD with a focus on the United States Treasury Secretary pick.

Tuesday's meeting of Hungary's central bank (MNB) should be a non-event in terms of a rate decision, pointed out ING. Central bankers have made it clear that the cutting cycle is on hold for some time due to high financial instability, meaning EUR/HUF is too high.

Numbers from the economy continue to surprise on the downside, with Q3 gross domestic product confirming a return to technical recession and headline inflation surprisingly holding close to the central bank's target. In fact, Hungarian headline inflation is the closest to the target among Central and Eastern European (CEE) peers at the moment. However, MNB's focus is on EUR/HUF which has repeatedly broken above 410.

While markets positioning is less short on the forint (HUF) than before the U.S. election, markets still see EUR/HUF heading more to the upside. So the MNB will have to show enough hawkish rhetoric on Tuesday to be able to return EUR/HUF to more acceptable levels.

At the same time, the MNB will want to avoid any hints of an additional rate hike or other stronger measures, added the bank. EUR/HUF briefly returned to 410 on Monday but surprised with a reversal below 407 at the end of trading. Visibly markets are looking for a way to go.

However, ING believes 410 will remain the point of gravity in the current global environment, which MNB doesn't fully control -- namely the negative for the entire CEE region led by EUR/USD pushing lower.