Lagarde adopts a dovish tone, but interest rate pricing remains anchored at 2.5%. The suspense over a rate hike in September remains unresolved.
- On Monday, European Central Bank President Lagarde struck a slightly dovish tone, noting that there is currently a lack of evidence for second-round effects to justify a more aggressive policy response. This statement subtly offsets market expectations that had previously priced in a more hawkish outlook.
- Current rate pricing still leans toward further hikes within the year, with September being the most likely window. However, a "one-and-done" scenario remains possible, especially if subsequent economic data continues to weaken. The recent memorandum of understanding reached between the US and Iran also marginally helps reduce the tail risk of rising inflation, further supporting this assessment.
- However, Chief Economist Lane recently stated that the upper bound of the neutral rate may have been revised up from 2.25% to 2.5%. This adjustment provides the European Central Bank with policy space for at least one more hike, while maintaining the narrative that policy has not yet reached restrictive levels.
- Overall, although Lagarde’s remarks were on the softer side, the policy reaction function will continue to depend on data. The current macro backdrop still tilts slightly in favor of a September rate hike over no hike. For the euro, the central bank’s dovish bias has limited upside, while incremental rate hikes are unlikely to offer significant support amid persistent drag from trade conditions. At this stage, the euro continues to mainly reflect the US dollar narrative, with broad USD strength dominating the exchange rate direction.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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