ECB's Rehn: Monetary policy should not be based on oil prices alone
At a Glance
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.
Full Analysis
What the desk is arguing
The desk interprets the ECB's recent commentary as a signal of a measured approach to monetary policy, particularly in light of energy price volatility. Rehn's remarks underscore the importance of assessing the potential spillover effects of energy prices on broader inflation metrics, which remain stable for now.
The ECB's commitment to maintaining inflation around the 2% target is evident, with Rehn suggesting that the central bank will respond based on updated economic projections. The market's expectation of an 86% likelihood of a rate hike in June reflects this cautious optimism, although the ECB remains vigilant regarding the potential for energy prices to influence wage growth and inflation expectations.
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: 1.08 (Mar26)
The desk's view aligns closely with jpmorgan, which anticipates a stronger euro, while diverging from bofa, which holds a more bearish outlook at the lower end of the range. This positioning suggests a consensus leaning towards a moderate bullish sentiment on the euro, contingent on upcoming data releases.
How other firms see it
Firms like jpmorgan and citi share a similar outlook, emphasizing the importance of data-driven decisions by the ECB and the potential for rate hikes if inflationary pressures persist. In contrast, bofa expresses skepticism regarding the sustainability of the euro's strength, citing potential geopolitical risks.
Traders should monitor the EUR/USD trajectory closely, as it is likely to reflect the ECB's policy adjustments. Additionally, keep an eye on the developments in the Strait of Hormuz, as any escalation could significantly impact energy prices and, by extension, the ECB's monetary policy stance.
What the calendar says
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From the original
Monetary policy should not be based on oil prices alone ECB needs to assess whether the energy shock spreads to inflation expectations, wages and core inflation It's worth preparing for a protracted conflict in the Strait of Hormuz If events turned out differently, it would be ea
Related speeches
4 itemsECB policymaker Makhlouf says concerned about energy prices staying higher for longer
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.