06:09 AM EDT, 10/25/2024 (MT Newswires) -- European Central Bank Governing Council member Joachim Nagel was asked on two separate occasions during his stay in Washington D.C. whether he would consider a 50bps rate cut in December and both times he refrained from explicitly pushing back, noted ING.

This is a perfect case in point in the latest -- substantial -- shift in the ECB's communication as Nagel is one of the most hawkish members of the GC and would have probably answered with a clearer "no" only a month ago, wrote the bank in a note to clients.

The ECB has shifted from a data-based to a "gut feeling" approach, with a much greater emphasis on growth sentiment, according to ING. Thursday's PMIs weren't as bad as expected in Germany but were below consensus in France and still in contraction territory for the eurozone as a whole.

One aspect of this shift is that the United States November presidential election can now have a greater bearing on the ECB's December decision. A Donald Trump win and associated tariff risks could tilt the balance to a 50bps cut unless data firmly suggests otherwise, stated the bank.

Financial markets are probably applying similar reasoning to ECB pricing and ING thinks there is a bit of Trump risk now embedded into those 35bps of easing factored in by year-end. Neither PMIs nor ECB speakers have done much to disincentivize dovish bets this week.

Friday, investors will hear from GC member Francois Villeroy de Galhau and take a look at the September inflation expectations figures published by the ECB.

EUR/USD is back above 1.0800, but the bank doubts there is much more room for a rebound. A wide short-term rate gap and the imminent U.S. election risk still point to a short-term move to the 1.0750 area.

Unlike her ECB colleagues, Bank of England hawk Catherine Mann stuck to her usual tone on Thursday, staying relatively pessimistic on disinflation and pointing to risks the BoE may cut too much too early, added ING. Three speeches by Governor Andrew Bailey this week have instead yielded little to no headlines.

There is one last chance for Bailey to talk monetary policy at a Saturday event, so beware of some early Monday reaction in sterling.

Thursday's PMIs in the United Kingdom were softer than expected, and while still looking decent compared with the eurozone, they are probably adding a bit of extra pressure to the BoE. Still, the gilt market and sterling are now laser-focused on next Wednesday's U.K. budget announcement, pointed out the bank.

Thursday, Finance Minister Rachel Reeves confirmed that she will change the fiscal rule to increase investments, which will pave the way to a potential increase in borrowing in the order of tens of billions. Gilts underperformed other developed market bonds after the fiscal rule announcement, and there seems to be a consensus view that U.K. yields have extra room to rise on budget news.

From a foreign exchange market perspective, what matters is whether any gilt underperformance turns into uncontrolled volatility. Given that sterling is pricing in no risk premium, the downside risks for the currency would be "very large."

For now, ING reiterates a bearish bias on GBP/USD, which can suffer from defensive positioning ahead of the combined U.K. budget and U.S. election risks. The bank's view remains that 1.28 can be reached in the near term.

The Czech koruna (CZK) remains the only currency in the Central and Eastern European region resilient to global volatility, touching 25.20 EUR/CZK on Thursday, the lowest since late September. The CZK is ING's favorite currency in the region at the moment, and it seems to be working well.