Geopolitics and oil, or the cancellation of the black scenario
Just two weeks after Christine Lagarde put investors on alert, suggesting inevitable rate hikes, the June deadline is no longer as certain as in the central bank. The main change has been in the energy market. Despite the ongoing war in Iran, oil prices have not exceeded the 2022 peak, when Brent was priced at 118 USD per barrel. The lack of a sharp pass‑through of energy costs to other sectors gives central bankers a breather.
Recently the narrative was simple – tighten policy unless price pressure falls and the war in Iran ends. Today the tone is entirely different. Officials suggest that inflation expectations would need to deteriorate significantly to prompt radical action. This is the classic pause in decision‑making – central banks worldwide, looking at uncertainty around Tehran, prefer to hold back from hawkish moves. Although there is still plenty of time before the ECB June meeting (June 10‑11), some analysts already argue that the option to keep rates warrants a more serious analysis than the current market consensus.
Chart. Euro‑area interest rates.
Source: Trading Economics
See also: Is the euro still in the shadows? Experts issue forecasts for EUR/USD and EUR/PLN. “The euro will suffer” – they warn.
Stagnation is not a foundation for higher credit
Macro data from 20 euro‑zone countries resemble slow graphic rendering on a 20‑year‑old computer. The economy is stalled, and the services sector has suffered a painful decline. While short‑term forecasts may alarm with faster inflation, medium and long‑term expectations remain stable. Finnish central bank chief Olli Rehn calms:
Inflation expectations are anchored, and wage dynamics appear to be fully under control.
This is very important because wages remain far below their historical peaks, effectively removing hawks’ arguments from the table. Even Isabel Schnabel, widely regarded as the most radical hawk on the ECB board, has begun to tone down her stance. She admits that while risk has increased, tighter monetary policy will only be required if a price shock in the energy market becomes widespread.
The currency pair EUR/USD fell by a symbolic 0.2% to 1.16.
Chart. Euro to dollar (EUR/USD)
Source: Trading Economics
See also: Will smartphone, tablet and computer prices rise? New government regulation ready.
Hawks vs reality – who blinks first?
While dovish signals are loud and clear, part of the market still plays for rate hikes. Traders bet on three upward moves, starting with the ECB June meeting. Bloomberg economists expect changes of 25 basis points in June and September. They firmly maintain their stance: Joachim Nagel from Germany, Martin Kocher from Austria, and Peter Kazimir from Slovakia. In their view, only “good news” from the geopolitical front could stop the ECB from moving up. Paul Hollingsworth from BNP Paribas goes a step further, suggesting that with a jump in energy prices we could even discuss a larger hike than the standard quarter point.
If the ECB holds back in June, it could fuel equity markets but also signal that economic fundamentals are weaker than investors thought. The ECB decision stakes are not only price stability in the euro zone but also the survival of the EU GDP, which is on the edge.
Regarding the currency pair EUR/PLN, it rose by 0.06% to 4.24.
Chart. Euro to zloty (EUR/PLN)
Source: Trading Economics
See also: Will rates not even tremble, RPP will hit the brake? Experts talk about “risks up for inflation.”
Source: Bloomberg
