ECB's Isabel Schnabel cautions that the peace deal fails to address underlying inflation pressures, pushing back against market bets on aggressive rate cuts and sending the euro higher as traders reprice the path of ECB policy.
German 10-year yields climbed as Schnabel's comments dashed hopes for rapid ECB easing, with the peace deal failing to shift the inflation outlook. The 10-year bund yield rose 5 basis points to 3.15%, reflecting repriced rate expectations.
Yields rise because investors adjust for a slower ECB rate-cutting cycle, as Schnabel's hawkishness implies rates will stay higher for longer than previously expected.
Short-term, yields may continue to edge higher as markets digest the hawkish message, but if economic growth falters, safe-haven demand could reverse the move.
Schnabel's hawkish warning of upside inflation risks despite a peace deal signals the ECB will maintain a restrictive stance longer than markets expected, boosting the euro. The euro gained as traders scaled back bets on imminent rate cuts, with EUR/USD rising above 1.10 on the comments.
Her hawkish remarks reduce the likelihood of near-term ECB rate cuts, making the euro more attractive relative to the dollar, driving EUR/USD higher.
EUR/USD approaches resistance at 1.1050, with a break above potentially targeting 1.1100, though much depends on upcoming eurozone data.
The DAX index slipped as Schnabel's hawkish tone raised concerns over tighter financial conditions and higher borrowing costs for European corporations. The peace deal had initially buoyed risk appetite, but the inflation warning undercut the positive sentiment.
Higher inflation risks mean the ECB will keep rates elevated, pressuring equity valuations and increasing financing costs for companies, which outweighs the positive impact of the peace deal.
Short-term sentiment is negative, but if the peace deal eventually boosts economic activity and earnings, the dip could be a buying opportunity. However, caution is warranted given the uncertain rate path.
ECB Executive Board member Isabel Schnabel warned that a peace deal will not eliminate upside risks to inflation, challenging market expectations for rapid interest rate cuts. She highlighted persistent wage growth and services inflation as key drivers, suggesting the central bank must remain cautious. The hawkish comments lifted the euro and German bond yields, while European equities slid as investors reassessed the monetary policy outlook.
Schnabel warned that despite the peace deal, upside risks to inflation persist due to factors like sticky services prices and wage growth, meaning the ECB should not prematurely declare victory over inflation.
Her comments suggest the ECB may delay or slow down rate cuts, as inflation risks remain tilted to the upside, undermining the case for immediate easing that markets had priced in light of the peace deal.
While a peace deal could reduce energy prices, Schnabel points to domestic inflationary pressures such as rising wages and resilient demand in services, which are not directly resolved by the end of geopolitical conflict.