The outlook for what the ECB (European Central Bank) will do with rates has gotten a little bit murky. Trader attention was distracted by the events in the Middle East which could have had a profound impact on the EURUSD. But, now that the conflict between Iran and Israel seems to be calming down, there appears to be a growing situation in the ECB.
At the last meeting when the ECB cut rates, the markets were pretty much expecting it. But what traders weren’t expecting was the pretty heavy suggestion that it would be the last cut for a while. Both the accompanying statement and President Christine Lagarde implied that interest rates were almost neutral, and that the risks were starting to be more on the upside. Since then, however, public views expressed by ECB officials have tended to diverge quite a bit.
Official vs Unofficial Stance
On Friday, the ECB’s Economic Bulletin affirmed the narrative that inflation was coming into line with the target. Seemingly, this establishes an official stance that rates have reached their neutral point, and therefore would stay where they are barring changes in the underlying economic data. And the Bulletin did go out of its way to emphasize uncertainty, and that rates will be decided on a meeting-by-meeting basis.
It looks like the narrative generally pushed by hawkish members of the ECB has taken hold. But, since the last meeting, several voices have come out to say that there might be room for at least another rate cut this year. ECB member from France, Francois Villeroy, made that argument as recently as Tuesday. He dismissed the potential inflationary effect of the Middle East situation, and argued inflation expectations were moderate.
What About the Data?
the ECB (European Central Bank) does acknowledge sluggish economic growth, which would tend to lower inflation. And require further easing to counteract. And on Monday, there appeared to be some signs of that with the release of flash June PMIs. They were lower than expected, and marked the 37th month of contraction for the economic bloc.
But, perhaps more interestingly was the bit of the survey showing that European businesses were experiencing little in the way of input cost increases. This is despite the trade war going on for nearly three months at this point. Even otherwise hawkish ECM member from Germany, Joachim Nagel, said on Tuesday that tariffs could be inflationary or deflationary.
What to Look Out For
The projections for an ECB pause might have been based on expectations that the trade war will push up inflation, necessitating higher rates. But, if tariffs reduce demand and have negligible or even negative inflationary effects, then the ECB (European Central Bank) might have to resume easing.
Key to resolving that point for now will be in the inflation data. Germany and France report their preliminary June CPI figures on either side of the weekend, which could give the market some clues as to whether economists are right about tariffs pushing up inflation. French June CPI is expected to rise to 0.9% from 0.7% in May. Meanwhile, German June CPI is forecast to tick up to 2.2% from 2.1% a month ago.