EUR: Policy repricing and energy shock risks – BNY

BNY’s Head of Markets Macro Strategy Bob Savage argues that the European Central Bank’s (ECB) hawkish tilt in response to the Iran-driven energy shock has pushed Eurozone front-end rates higher, even as inflation expectations remain contained. Savage warns that further hikes would need clear justification from shifting expectations and data, with upcoming PMI and ifo releases key for gauging growth and input-cost pressures in the Euro area.

ECB hawkishness versus fundamentals

"The energy shock has triggered a sharp monetary policy reassessment, with the European Central Bank (ECB), Bank of England (BoE), and FOMC all signaling a more hawkish stance than expected. Breakeven inflation rates have surged, while yield curves have flattened, repricing rate hike expectations sharply higher."

"The ECB and BoE’s refusal to look through the conflict has pushed rate hike pricing higher."

"We would not rule out hikes in the near term, but any moves need justification in shifting expectations, and nothing points to more than precautionary moves rather than a new cycle."

"Otherwise, it will be a quiet data week, but the ECB will be very attentive to the preliminary March PMI and ifo releases out of Germany, which will provide the first indications of the impact on the conflict for industry and exporters, especially in terms of input costs."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)