ECB's Muller: Inflation to accelerate in the coming months
At a Glance
The desk views the ECB's potential pivot towards rate hikes as increasingly likely, driven by rising inflation expectations linked to geopolitical tensions, particularly the US-Iran conflict. Per the full note source, ECB Governing Council member Madis Muller indicated that inflation is set to accelerate, which could necessitate a rate hike unless energy prices decline significantly. The market is currently pricing in a 77% probability of a rate hike in June, with expectations of 70 basis points of tightening by year-end, underscoring the urgency of the ECB's response to inflationary pressures.
Key Takeaways
- 01ECB's Madis Muller signals potential for rate hikes due to rising inflation.
- 02Market pricing indicates a 77% chance of a June rate hike and 70 bps tightening by year-end.
- 03Geopolitical tensions, particularly the US-Iran conflict, are key drivers of inflation expectations.
- 04Consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12.
Full Analysis
What the desk is arguing
The desk posits that the ECB is on the verge of a policy shift, with inflation pressures mounting due to external factors like the US-Iran war. This sentiment is echoed by ECB member Madis Muller, who suggests that unless the conflict abates and energy prices stabilize, a rate hike is increasingly likely.
Market participants are reacting to this narrative, with a 77% probability of a June rate hike priced in. This reflects a broader tightening of financial conditions that has already begun to manifest in long-term interest rates, which Muller noted could lose their effectiveness if rates remain unchanged for too long.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This perspective aligns closely with jpmorgan, which anticipates a stronger euro in light of potential ECB tightening, while diverging from bofa, which remains cautious about the euro's strength amidst ongoing geopolitical risks.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's view, anticipating that inflationary pressures will prompt the ECB to act decisively. Conversely, bofa holds a contrary stance, suggesting that economic uncertainties may temper the ECB's actions.
Traders should also monitor the EUR/USD trajectory, as it closely mirrors ECB policy decisions, particularly in light of the anticipated rate hikes. Additionally, the dynamics of energy prices will be critical in shaping market sentiment around the euro's strength.
What the calendar says
(omit this section entirely if no upcoming events)
Market Implications
Traders should watch for the June ECB meeting, where a rate hike could significantly impact the EUR/USD pair. A break above 1.08 could signal further bullish momentum for the euro.
From the original
Inflation to accelerate in the coming months EBC's Governing Council member Madis Muller expects inflation to accelerate in the coming months due to the US-Iran war. On Friday, Muller said in a blog post that a rate hike is now increasingly likely unless the conflict in the Middl
Related speeches
4 itemsECB's Muller: The ECB will need a fast resolution on Hormuz to hold in June
The desk interprets the ECB's recent commentary as a signal that the central bank is poised to act if geopolitical tensions in the Strait of Hormuz persist, potentially impacting their June rate decision. Per the full note [source], ECB's Muller emphasizes the need for a swift resolution to avoid a rate hike, despite current inflationary pressures. The Eurozone's modest GDP growth of 0.1% in Q1 and declining PMIs suggest underlying economic challenges, reinforcing the ECB's cautious stance. As the market anticipates potential rate hikes, the consensus among analysts remains divided, with some projecting two hikes this year depending on oil price movements and geopolitical developments.
ECB policymaker Schnabel says that a June rate hike will be needed
ECB's Nagel says bank may have to act in June as Iran energy shock spreads
Christine Lagarde, Luis de Guindos: Monetary policy statement (with Q&A)
The ECB's recent monetary policy statement highlights a cautious stance amidst rising inflation and geopolitical tensions. Per the full note [source], President Lagarde emphasized the need for a data-driven approach as inflation surged to 3.0% in April, driven primarily by energy prices linked to the ongoing conflict in the Middle East. The desk interprets this as a signal for potential volatility in the eurozone, particularly as the ECB remains non-committal on future rate paths. With the upcoming CPI and inflation rate data on June 2, traders should prepare for possible market reactions based on these indicators.
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