ECB President Christine Lagarde stated that the institution is prepared to utilise its tools to ensure price stability.
Market expectations indicate a certainty of a 25 basis points cut in the upcoming week’s meeting, with projections of at least two additional rate cuts by the end of the year.
Traders And Inflation Data
Traders have already begun pricing in the first reduction, which suggests confidence that policymakers are comfortable with the recent inflation data. Lagarde’s reassurance on maintaining control over price pressures acts as a subtle confirmation that the European Central Bank is not only aware of its trajectory but also willing to respond firmly if disinflationary trends begin to drift.
The forward rate path, now embedding further reductions, reflects a larger assumption: that economic activity across the euro area remains soft enough to justify continued support. Demand pressures still appear subdued, and recent wage data, while ticked higher, have not sparked widespread concern. If core pricing does not flare up again, then easing policy further becomes not just likely but perhaps necessary by their standards.
Given the bond market’s recent reaction, we must keep an eye on how yield curves adjust in the coming sessions. Flattening in certain maturities suggests cautious optimism—with lower long-term inflation risks—though this could also firm resistance above current market levels if expectations shift too sharply.
Monitoring liquidity-sensitive assets will help show us whether risk sentiment is being recalibrated or just reacting to shorter-term positioning. Key rate-sensitive financial instruments have already responded, implying that participants see little chance of a surprise in the June decision.
Schnabel And Services Inflation
Schnabel’s recent remarks on staying wary of fresh inflation sources are still worth noting, in light of improved services inflation. While that remains above target, the lack of any urgent rhetoric around it suggests that conditions have not become disorderly, in their view.
Volatility across euro futures has remained tame. This calm may continue if data releases keep within expected ranges. Any deviation—especially from labour markets or revised consumer spending—could challenge prevailing assumptions and shift terminal rate bets once more.
We think positioning should remain nimble. Front-end traders may benefit from holding a mild downward bias, particularly while euro-area surveys hover below long-term averages. But limiting exposure through spreads or optionality is a way to avoid whipsaws, especially as geopolitical headlines risk pushing bonds abruptly.
Clues from Lagarde’s tone imply that any tightening scenario is firmly off the table, unless data forces their hand. With that, upward moves in front-end rates seem capped. This offers a basis for relative value opportunities between short-dated European government debt and comparable maturities elsewhere.
For now, our focus is on near-term rate sequencing—how they move, but also in what tone. Their communication style is intentionally cautious, which may limit erratic reactions. That said, surprises still can stem from inflation readings that challenge the market’s timeline.
We will watch next week’s decision closely, but even more so, how succeeding minutes are framed. Often, it is not the rate move but the hint of what follows that drives re-pricing.
