The European Central Bank (ECB) President noted that the services sector is slowing down, and surveys show weaker outlooks in the near future. Rising tariffs and a stronger euro are likely to make exports tougher. However, investments in defense and infrastructure are expected to help the economy grow.

Economic Growth and Inflation

These investments could increase inflation in the medium term. However, risks to growth are mainly negative, and there is no set path for interest rates. The ECB believes it is ready for upcoming uncertainties, even though members have different opinions. They have not yet discussed the neutral interest rate. The ECB is confident in its current rate strategy and in the ability of the President to complete their term. Following the press conference, the euro gained strength due to a weakening US dollar. The article highlights a slowdown in the eurozone’s resilient services sector, with surveys showing less optimism for the future. This decline comes after a time when services countered slow growth in goods-producing industries. With both sectors weakening, future growth looks uncertain. The strong euro and rising tariffs also add challenges for exporters. A strong euro can reduce foreign demand by making eurozone products more expensive internationally. Nonetheless, government investments in infrastructure and defense indicate that growth won’t completely stall. These long-term investments can keep some economic activity alive, even as private-sector growth slows. However, government spending does come at a cost. Over time, such spending tends to increase inflation, especially if the economy has limited capacity. As inflation expectations remain above target, we should be cautious about the potential for rising prices from these investments. Central bankers are not eager to change the current strategy and believe interest rates can be adjusted gradually, as long as no major shock occurs. Internally, opinions vary, not on whether conditions have improved, but on how tight monetary policy should be to control inflation. There is no agreement on what the neutral interest rate should be, causing market fluctuations based on comments or forecasts instead of clear guidance, which could lead to volatility.

Market Reactions and Expectations

With a softer US economic backdrop weakening the dollar, the euro appreciated following the ECB’s press conference. Markets viewed the President’s comments as measured and steady. While the remarks were balanced, traders focused on the idea that there wouldn’t be rapid policy changes, which supported the euro. However, this might complicate growth through trade. The key issue is how inflation will respond to public investment alongside external challenges. While the overall tone remains confident, short-term interest rate spreads could react sharply to inflation surprises or energy price changes. The lack of discussion about the neutral rate means policy reactions could remain flexible—data will guide decisions, not just rhetoric. As summer brings more data, we expect potential market movements that may not directly match the news. Therefore, our strategies should account for the possibility that news and market prices may not always move in sync. Sometimes, market shifts might be influenced more by changes in interest rate expectations or currency flows than by economic fundamentals. Create your live VT Markets account and start trading now.

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