ECB policymaker Kocher says waiting in April meeting was a justifiable decision
The desk interprets ECB policymaker Kocher's recent comments as a clear signal of the central bank's cautious approach amid rising inflation risks tied to geopolitical tensions. Per the full note source, Kocher emphasized that while the ECB's decision to hold rates steady in April was justified, the ongoing Middle East conflict could necessitate action sooner than later. This aligns with market expectations, which currently price in approximately 80% odds of a rate hike by the June meeting. With inflation pressures mounting, the desk anticipates that the ECB will need to act decisively if conditions do not improve rapidly.
What the desk is arguing
The desk views Kocher's remarks as indicative of a precarious balancing act for the ECB, where inflationary pressures from external conflicts could jeopardize economic recovery. Per the full note source, Kocher highlighted the potential for stagflation, even as the labor market remains resilient, suggesting that the ECB must remain vigilant and ready to act if inflation expectations begin to shift.
Supporting this view, the desk notes that the ECB is facing significant pressure from rising energy prices and the potential for second-round effects stemming from the ongoing conflict. With market participants pricing in a high likelihood of a rate hike by June, the ECB's credibility hinges on its ability to respond to these evolving risks.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range from 1.04 to 1.12. Notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with jpmorgan, which anticipates a more aggressive ECB response, while bofa remains cautious, suggesting a lower target. The desk's outlook sits at the upper end of the consensus range, reflecting a belief in imminent policy action.
How other firms see it
Firms like jpmorgan and goldman are aligned with the desk's view, suggesting that the ECB will need to respond to inflationary pressures sooner rather than later. Conversely, bofa and citi express skepticism about the need for immediate action, citing potential economic headwinds.
The trajectory of EUR/USD will be closely tied to ECB policy shifts, particularly as inflation indicators and geopolitical developments unfold. Additionally, watch the interplay between the ECB's decisions and the Federal Reserve's stance, as this could create volatility in the FX markets.
What the calendar says
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Economic recovery is now at risk Inflation risks have heightened due to the Middle East conflict Risk of a stragflationary trend cannot be ruled out even if economy, labour market remain resilient The duration of the Middle East conflict will be the decisive factor It was a justifiable decision to wait before raising interest rates in April meeting But that doesn't mean one should wait too long before taking action That especially if the situation regarding energy prices does not improve rapidly and significantly If the war persists for an extended period, the risk of second-round effects will increase ECB will remain vigilant and, if necessary, act in a timely and decisive manner There are no major changes to medium and long-term inflation expectations yet, but there are initial signs It would be irresponsible to commit to any decision many weeks in advance (when asked about next meeting) But unless the situation improves significantly, a rate move will be unavoidable in the near future They have to play things down a little after the April move but as the war rages on, they can't afford to stay on the sidelines for too long. And markets are also making that clear, pricing in ~80% odds of a rate hike by the time we get to the next meeting in June. It would be poor form for the central bank to walk back on that and undo the tightening from markets, particularly at a rather sensitive time such as this one.
That being said, the ECB is put in a very tough spot to balancing policy and prevailing economic conditions . The hit from the US-Iran conflict on households is going to be a big one. And amid resurgent inflation pressures, there is genuine concern of a stagflation hit to the euro area.
This article was written by Justin Low at investinglive.com.
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