ECB Schnabel: Some damage from Iran War will be hard to reverse
At a Glance
The desk interprets ECB member Isabel Schnabel's recent comments as a signal that the fallout from the Iran conflict could lead to persistent economic challenges, particularly in the Eurozone. Per the full note source, Schnabel highlighted the potential for irreversible damage and noted reemerging supply chain disruptions, which could necessitate a tightening of monetary policy if inflation expectations continue to rise. This perspective aligns with our view that the ECB may need to act more decisively to combat inflation pressures, especially if energy price shocks materialize. The current market sentiment appears to be underestimating these risks, creating a potential disconnect that traders should monitor closely.
Full Analysis
What the desk is arguing
The desk believes that the ECB is likely to tighten monetary policy sooner than the market anticipates due to rising inflation risks stemming from geopolitical tensions. Schnabel's remarks indicate that the economic damage from the Iran war is not only significant but could also be long-lasting, which is a crucial consideration for traders.
Schnabel pointed out that a growing number of European manufacturing firms are planning to increase prices, signaling that inflation expectations are adapting rapidly. If energy prices rise further, the ECB may be compelled to tighten policy more aggressively than previously expected, which could shift market dynamics significantly.
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)
This view aligns with jpmorgan, which anticipates a stronger euro, while bofa holds a more cautious stance at the lower end of the range. The desk's call is positioned at the upper bound of the consensus spread, suggesting a bullish outlook on the euro against the dollar.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's view, anticipating that the ECB will need to respond to inflationary pressures with tighter policy. Conversely, bofa and hsbc maintain a more bearish outlook on the euro, reflecting concerns over economic growth and potential recessionary pressures.
Traders should keep an eye on related currency pairs such as EUR/GBP and EUR/JPY, as their movements could provide additional context for the ECB's policy trajectory and the overall euro outlook.
What the calendar says
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From the original
ECBs Schanabel is speaking and says: My view is that some damage done from Iran war will be hard to reverse There seems to be a disconnect between the stock market and the global situation. Earlier, Schnabel said: Signs of supply chain disruptions are reemerging. Rapidly growing
Related speeches
4 itemsECB policymaker Schnabel says that a June rate hike will be needed
ECB's Villeroy: Iran conflict creates risk to growth and inflation
ECB's Nagel says bank may have to act in June as Iran energy shock spreads
ECB'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.
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