06:14 AM EDT, 03/20/2025 (MT Newswires) -- EUR/USD has again failed to make a decisive move above 1.10 this week, in line with ING's expectations.

The bank thinks Wednesday's FOMC announcement can give some breathing space to US dollar-denominated assets and stabilize the dollar by keeping dovish expectations relatively capped. ING's call remains that 1.07 is more likely than a break above 1.10 as the next big directional move for EUR/USD as the United States tariffs regain dominance in April. But the path to a EUR/USD decline won't be a smooth one.

The main event in the eurozone on Thursday is European Central Bank President Christine Lagarde's European Parliament hearing. That could be a marginally positive event for the euro as Lagarde could take the chance to bring the narrative more to a neutral stance, wrote the bank in a note.

The German fiscal package is, in ING's view, lifting pressure from the ECB to support the eurozone economy and a 2.25% terminal rate -- in other words, only one more cut -- is now the bank's base case. ING doubts the ECB or Lagarde herself want to close out optionality, but a cautious shift in implicit guidance is likely appropriate already at this stage.

The Bank of England is widely expected to keep rates on hold Thursday. ING highlights how the deterioration in employment sentiment is still to show in official data. That should prevent the BoE from sounding much more dovish given a backdrop of sticky services inflation and wages. Thursday, jobs figures for January showed unemployment was unchanged at 4.4% and wage growth was still close to 6%.

Markets aren't pricing in any easing risk on Thursday, but February's widely expected rate cut brought about a surprise vote split as former arch-hawk Catherine Mann voted for a larger, 50bpa reduction. ING expects that she will join perma-dove Swathi Dhingra as the only two members voting for a cut on Thursday.

The risk is probably that dovish-leaning Alan Taylor joins them to make it a closer 6-3 vote split for a cut. That may be read as a marginally dovish signal and partially weigh on sterling on Thursday, but markets seem to be aware that data progress is needed to tilt the balance decisively to the dovish side.

The bank's call remains slightly more dovish than pricing as it sees three more 25bp reductions this year.

Sterling saw some strengthening against the euro on Wednesday, mostly thanks to its higher beta to global sentiment and some unwinding of EUR/USD longs, added ING. The United Kingdom government announced plans to scale back social benefits on Wednesday, and Labour officials have signaled Finance Minister Rachel Reaves won't raise taxes at next week's Spring Statement.

This means spending cuts will be closely scrutinized by gilt investors. Should Reaves announce convincing fiscal rigor measures, the gilt market may not get unnerved, but sterling can still drop on worsened economic expectations.

The Riksbank is the other European central bank announcing policy on Thursday. Expectations for monetary easing have been almost entirely erased after recent fiscal events in Europe and stronger-than-expected February inflation in Sweden, according to ING. The bank's call is that the Riksbank is at its terminal rate (2.25%) and Thursday's widely expected hold may reinforce the neutral guidance.

The implications for the krona (SEK) aren't huge in the near term. The krona benefitted in February/early March from an ideal combination of booming European sentiment, dovish Fed repricing, hopes of a Ukraine-Russia truce and rotation to SEK-denominated assets. The drop in EUR/SEK looked overdone and ING's models show that there is still upside room to recover for the pair despite the recent rebound.

Dovish risks are smaller for the Riksbank than the ECB in the bank's view, and this can help prevent a return to the 11.50 area -- which was the anchor level before the big February correction. Still, souring European sentiment as United States tariffs kick off in April can smoothen the recovery to 11.20 in EUR/SEK.

More than any potential rate cut by the Riksbank, downside risks for the krona mostly stem from the external environment - in particular any geopolitical risks associated with Russia and the weakening of NATO.

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