Christine Lagarde said the ECB kept key interest rates unchanged at its April meeting, after the economy showed momentum before recent turbulence. She said domestic demand remains the main driver of growth, but the outlook is highly uncertain.
She said incoming information suggests the conflict is weighing on activity and that business confidence about the future has weakened. She added that supply chains are coming under pressure.
Energy Prices And Growth Uncertainty
Lagarde said high energy prices are likely to weigh on incomes and could make firms and households reluctant to invest. She said labour demand has cooled further, while households remain in a solid financial position and a favourable starting point offers some cushioning.
She said fiscal responses should be temporary, targeted and tailored. She also said indicators of underlying inflation have changed little in recent months.
Lagarde said a wage tracker points to easing labour cost growth, while surveys indicate rises in other costs. She said most measures of longer-term inflation expectations are around 2%.
She said higher energy prices will keep inflation well above 2% in the near term and the ECB will closely monitor the size and impact of the energy price surge. She said risks to growth are tilted to the downside.
Trading Implications And Risk Positioning
The outlook is highly uncertain, as slowing economic momentum is clashing with persistent inflation driven by high energy costs. The central bank is essentially sidelined for now, unable to hike due to growth risks but unwilling to cut because of prices. This suggests a period of elevated market volatility in the coming weeks.
Downside risks to growth are becoming more pronounced, with businesses clearly losing confidence. Germany’s latest IFO Business Climate index, for instance, fell to 89.5, marking its third consecutive monthly decline. This environment favors bearish positions on European equities, making put options on indices like the DAX or Euro Stoxx 50 an appropriate hedge or speculative play.
Inflation remains a significant problem, as the flash Eurozone inflation figure for April came in at 3.1%, stubbornly above the 2% target. With Brent crude prices staying above $95 per barrel, there is little chance of near-term rate cuts. Traders should anticipate a ‘higher for longer’ rate environment, positioning in interest rate futures that reflect no policy easing until at least late this year.
We’re also seeing labour demand cool, reversing the positive trend we observed through much of 2025 as the unemployment rate ticked up to 6.7%. This combination of weak data and central bank inaction is a recipe for volatility. The VSTOXX index has been hovering around 22, and buying VSTOXX calls could be a cost-effective way to profit from expected market swings.
This cautious tone on growth puts downward pressure on the euro, especially relative to currencies whose central banks remain more hawkish. While households are in a solid financial position, the broader headwinds from the conflict and energy prices are stronger. Consequently, shorting the EUR/USD pair through futures or options appears to be a logical strategy for the weeks ahead.
