The European Central Bank raised its deposit rate by 25bp to 2.25%, its first rate increase since 2023, and President Christine Lagarde’s accompanying communication leaned hawkish. The ECB also revised up its inflation outlook, projecting headline inflation to average 3.0% in 2026 versus 2.6% previously, while expecting core inflation to remain above 2% through 2028, with a 2.2% reading cited.
Deutsche Bank’s European economics team continues to look for a further move in September that would take the deposit rate to 2.50%, based on forecasts that are softer than the ECB’s. It also assigns a higher probability to rates rising to 2.75% than to the cycle ending at 2.25%. The bank’s commentary also referenced Middle East developments as a separate market focus.
ECB Rate Path and Inflation Projections
Given the European Central Bank’s rate hike to 2.25% on June 11, 2026, we see a clear hawkish path forward. The ECB’s own projections now show core inflation staying above their 2% target all the way to 2028. This suggests the market should prepare for a higher terminal rate than previously expected.
We should adjust positions in short-term interest rate futures to reflect at least one more hike in September 2026. Overnight index swaps are already pricing in a greater than 70% chance of rates reaching 2.50% by then. This view is supported by the latest Eurostat flash estimate for May 2026, which showed headline inflation holding at a stubborn 3.1%.
Market Implications and Positioning
This policy divergence should favor the Euro, so we are looking at long EUR/USD positions through call options or futures. During the aggressive hiking cycle of 2022-2023, the Euro saw significant rallies against currencies with less aggressive central banks. We expect a similar, though more muted, pattern to emerge over the summer.
For equities, higher borrowing costs present a headwind, making protective put options on indices like the Euro Stoxx 50 a sensible strategy. The conflict between fighting inflation and facing softer economic data, such as Germany’s recent 0.2% contraction in industrial production, will increase market volatility. We believe VSTOXX futures and options offer a good way to trade this expected turbulence.
