OCBC and ING assess shifting policy expectations

Institutional banks suggest a mildly supportive backdrop for the Mentioned Asset, with softer euro-area inflation and uncertainty over further European Central Bank (ECB) tightening contrasted with expectations of falling short-dated US rates and lower dollar hedging costs. Together, these dynamics point to a potential shift in relative policy expectations and capital flows that could influence demand for the Mentioned Asset over the coming months.

OCBC sees softer euro-area inflation complicating the ECB’s tightening path

OCBC highlights that “since the 11 June meeting, oil prices have fallen sharply and June Consumer Price Index (CPI) data surprised on the downside,” signaling a weaker inflation impulse in the euro area. Despite this, OCBC’s base case is still "for one final ECB rate hike in September," while acknowledging that ECB President Christine Lagarde’s Sintra remarks have raised the risk that June was a 'one-and-done' move. For the Mentioned Asset, this mix of softer inflation and uncertain additional tightening points to a less aggressive ECB path, which could temper expectations for euro-area yields and influence relative attractiveness versus US assets.

"OCBC: Since the 11 June meeting, oil prices have fallen sharply and June CPI data surprised on the downside."

ING expects lower US short-dated rates to reduce dollar hedging costs

ING notes that “if the Fed does indeed continue to look through temporarily higher inflation without hiking, short-dated US interest rates would be falling come September.” ING adds that "that will bring dollar hedging costs lower and encourage foreign investors to raise FX hedge ratios on US assets." For the Mentioned Asset, this suggests that declining US front-end yields and cheaper dollar hedging could shift foreign investor behavior toward higher FX hedge ratios, potentially affecting cross-border flows and the currency dynamics linked to the Mentioned Asset.

"OCBC: Our base case remains for one final ECB rate hike in September, although ECB President Lagarde’s comments in Sintra have increased the possibility that June marked a 'one-and-done' move."