ECB policymaker Makhlouf says concerned about energy prices staying higher for longer
At a Glance
The desk anticipates a more hawkish stance from the ECB in light of rising energy prices and inflation concerns. Per the full note from Justin Low, ECB policymaker Makhlouf expressed worries that energy prices may remain elevated due to ongoing geopolitical tensions, particularly in the Middle East. This situation could lead to cost-push inflation, prompting the ECB to consider 'insurance' rate hikes to maintain credibility and manage inflation expectations. With the consensus target for EUR/USD at 1.075, the market is closely monitoring these developments as they unfold.
Key Takeaways
Full Analysis
What the desk is arguing
The desk posits that the ECB is likely to adopt a more aggressive monetary policy stance in response to persistent inflationary pressures driven by higher energy costs. Per the full note, Makhlouf's comments underscore the urgency for the ECB to monitor inflation expectations closely, as prolonged high energy prices could lead to de-anchoring.
The potential for 'insurance' rate hikes could see the deposit rate facility rise to between 2.25% and 2.50%, a move designed to provide leeway for further adjustments if necessary. This aligns with the ECB's need to balance economic growth with inflation control, especially if the geopolitical situation remains unresolved.
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 firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan, which shares a similar outlook on the ECB's potential rate hikes, while bofa takes a more cautious stance at the lower end of the range. The desk's call sits at the midpoint of the consensus spread, reflecting a balanced view of the current economic landscape.
How other firms see it
Firms like jpmorgan and citi are aligned in their expectations for a hawkish ECB response, suggesting a consensus on the need for proactive measures to combat inflation. Conversely, bofa remains skeptical, advocating for a more conservative approach given the uncertain economic environment.
Key currency pairs to watch include EUR/USD and GBP/USD, as their trajectories will likely reflect the ECB's decisions and the broader market sentiment regarding inflation and energy prices.
What the calendar says
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Market Implications
Traders should watch for potential ECB rate hikes that could influence EUR/USD movements, particularly if energy prices remain elevated. A break above 1.08 could signal increased bullish sentiment, while a drop below 1.05 may indicate a shift in market expectations.
From the original
Inflation expectations need to be closely monitored for signs of de-anchoring Worried that energy prices may stay higher for longer without a clear timeline for end to Middle East conflict Will be paying close attention to indirect effects of higher energy prices That being how i
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The desk views the ECB's current stance on monetary policy as cautiously optimistic, emphasizing that oil price fluctuations should not dictate policy decisions. Per the full note [source], ECB's Rehn highlighted the need to monitor the broader implications of energy costs on inflation expectations and wages, suggesting that the current energy shock is less severe than that of 2022. With the market pricing in an 86% chance of a rate hike in June, the desk notes that the ECB's decisions will be data-driven and contingent on developments in the Strait of Hormuz. This aligns with our consensus target for EUR/USD at 1.075, with a range of 1.04 to 1.12, indicating a cautious approach ahead of key data releases.