MUFG’s Derek Halpenny says rising European yields reflect expectations that the ECB will deliver a 25bp rate hike on 11 June, with baseline inflation projections set to be revised higher. While an ECB blog suggests the energy shock is unlikely to become persistent, markets have fully priced one hike and nearly a second by September, limiting EUR/USD downside from rate spreads.

ECB pricing supports Euro resilience

"The 2-year yield is now around the 2.55% level which could quickly be deemed as too low if the ECB follows through on the clear communication of late that suggests a 25bp policy rate hike on 11th June is very likely."

"Chief Economist Philip Lane spoke yesterday and confirmed that the ECB would be raising further its inflation projections under the baseline scenario – in March the baseline scenario inflation projection for 2026 was 2.6% (the projections for adverse and severe were 3.5% and 4.4% respectively)."

"Lane added that the energy shock shifting into a broader inflation problem would be a “major issue” for the ECB."

"So that likely means limited action will be required from the ECB but with the baseline inflation projection set to rise, not hiking rates would certainly be questioned and difficult to explain."

"EUR/USD downside risks from here on rate spread moves should be limited given the Fed is unlikely to hike rates in 2026."

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