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
...
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.
ECB policymaker Schnabel says that a June rate hike will be needed
Piero Cipollone: The new energy shock: economic scenarios and policy implications
The desk argues that the ongoing energy crisis, exacerbated by geopolitical tensions, poses significant risks to the euro area's economic stability and inflation targets. Per the full note [source], the ECB's Piero Cipollone highlights that the recent surge in energy prices, driven by the war in Iran and the closure of the Hormuz Strait, could undermine the euro area's recovery and inflation trajectory. Current inflation rates have already risen to 3%, with energy prices contributing a substantial 10.9% increase. Ahead of the upcoming CPI data release on June 2, traders should be vigilant about how these developments may influence ECB policy decisions.
Rates Spark: Euro rates and the war
The desk believes that the European Central Bank (ECB) is maintaining a cautious stance on interest rate hikes, largely influenced by geopolitical tensions surrounding Iran. Per the full note [source], ECB officials like Bundesbank’s Nagel and Austria’s Kocher indicate that a rate hike remains possible unless there is a significant improvement in the situation, which continues to link the front-end discount to oil prices. This perspective aligns with our view that the ongoing war standoff will keep the ECB on edge, potentially impacting the euro's valuation against major currencies. With no high-impact events on the calendar in the next 30 days, traders should focus on geopolitical developments as the primary catalyst for market movement.
More from INVESTINGLIVE
5 items- INVESTINGLIVEMay 27, 2026
RBNZ's Breman signals cash rate must rise further as inflationary pressures build
- INVESTINGLIVEMay 27, 2026
Fed's Cook flags oil price as key risk as she watches inflation expectations closely
- INVESTINGLIVEMay 27, 2026
Fed and ECB take centre stage at BOJ conference day two fireside chat
- INVESTINGLIVEMay 27, 2026
RBNZ Gov Breman sees weaker growth, inflation. Monitoring.
- INVESTINGLIVEMay 27, 2026
Fed Gov Cook says rates should hold for now but flags hike risk on stubborn inflation