ECB Governing Council member Peter Kazimir said monetary policy still has further work to do, pointing to an energy shock feeding through into the economy and calling for ECB vigilance and readiness to respond. He indicated discomfort with a core inflation outlook above 2%, even under additional tightening, and suggested a preference for frontloading further action while remaining agile as incoming data change.
His remarks came despite a US–Iran peace framework, with the comment that damage in the Middle East cannot be reversed quickly. The euro showed no immediate reaction, though EUR/USD was later 0.37% higher, trading near 1.1610 during an upbeat market session.
ECB Hawkishness And Market Positioning
It is becoming clear that monetary policy has more work to do, suggesting the European Central Bank may be more aggressive than currently priced. With the latest Eurozone core inflation print for May coming in at a stubborn 2.8%, we are positioning for higher short-term interest rates. This involves looking at paying fixed on interest rate swaps or selling Euribor futures to anticipate a more hawkish ECB.
There appears to be a preference for frontloading the work that needs to be done, which could mean a larger rate hike in the near term. This strategy is reminiscent of the US Federal Reserve’s actions in 2022 when they used large, decisive hikes to control runaway inflation. Therefore, the market, which has been anticipating a pause from the ECB’s current 4.25% deposit rate, may be misjudging the central bank’s resolve.
Despite these hawkish signals, the Euro has not yet reacted decisively, trading near 1.1610. We view this as a potential buying opportunity for the currency against the US dollar, as higher rate expectations should provide support. We are considering buying EUR/USD call options to capitalize on a potential upward move while limiting downside risk.
Energy Shock, Inflation, And Equity Risks
The recent US-Iran peace framework has not immediately solved the underlying energy price issues feeding into inflation. Brent crude prices are still holding around $95 a barrel, a level high enough to keep pressure on the economy. The damage to Middle East supply chains cannot be undone overnight, meaning this energy shock requires our continued vigilance.
This hawkish outlook makes us cautious on European equities, as higher borrowing costs could dampen corporate earnings and economic growth. We are looking at protective put options on major indices like the Euro Stoxx 50. Similarly, credit spreads could widen, so we are reviewing exposure to corporate debt.
