ECB June hike near-certain as Middle East energy shock forces policymakers' hand

What the desk is arguing

The desk believes that the ECB's June meeting will result in a rate hike, primarily influenced by the escalating energy crisis stemming from the US-Iran conflict. Per the full note source, the urgency to act is underscored by rising energy costs that threaten to exacerbate inflationary pressures across Europe.

Analysts are pricing in two hikes as a ceiling, which would elevate the ECB's main policy rate to the upper bound of its neutral rate estimate range of 1.75% to 2.5%. This move is seen as essential to anchor inflation expectations rather than to impose aggressive economic restrictions.

The alternative read would suggest that the ECB could maintain rates if the energy crisis subsides, but current geopolitical tensions make this scenario less likely.

Where it sits in our coverage

Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)

This view aligns with jpmorgan, which supports the idea of a rate hike, while bofa remains more cautious, suggesting a lower target that reflects a divergent outlook on the ECB's policy trajectory.

How other firms see it

Firms like jpmorgan and citi are aligned with the expectation of a June rate hike, emphasizing the need for the ECB to respond to external inflationary pressures. Conversely, bofa holds a contrary view, suggesting that the ECB may not need to act as aggressively given the potential for growth concerns.

Watch the EUR/USD trajectory closely, as it will likely reflect the ECB's rate path and the broader implications of the geopolitical landscape affecting energy prices.

What the calendar says

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