ECB's Muller: Inflation to accelerate in the coming months
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.
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
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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.
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.
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 Middle East ends before the next meeting and energy prices fall markedly. He noted that the ECB could afford holding interest rates unchanged last week "partly because long-term interest rates have already risen in financial markets and contributed to some tightening of financing conditions, which is necessary to counter price pressures".
But he warned that "this so-called advance effect loses its power if central bank's interest rates remain unchanged for a longer period of time". The usual ECB sources , that generally signal policy changes after the official ECB decision, said on Thursday that a June hike was "very likely" and that policymakers were in broad agreement. Moreover, several Governors thought that at least two hikes will be needed unless the war ended and Brent quickly dropped.
The market is pricing in a 77% probability of a rate hike in June with a total of 70 bps of tightening by year-end. This article was written by Giuseppe Dellamotta at investinglive.com.
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