ECB dovish surprise weakens Euro as hike in June now 'highly likely'

Today’s ECB meeting delivered a reassuring message, suggesting a measured approach to monetary tightening amid considerable uncertainty due to the Iran conflict. The communications carried both dovish and hawkish undertones.

Lagarde confirmed that the situation is 'certainly moving away' from the baseline scenario and acknowledged that a rate hike had been discussed at today's meeting, while emphasising that the decision to hold was unanimous. She also gestured toward the possibility of a rate increase in June, describing it as the 'right time' to reassess the situation in light of the ongoing conflict. She also mentioned the bank is not seeing second-round effects, and several of her remarks remained deliberately ambiguous and non-committal.

Market expectations for ECB hikes have eased somewhat, and the euro weakened during the press conference, suggesting investors had anticipated a more decisively hawkish tone. That said, a June rate increase remains close to fully priced in.

The fact that policymakers have already debated raising rates – coupled with Lagarde's emphasis on additional information becoming available in the coming weeks – suggests that a hike in June is highly likely, absent a sharp drop in oil prices. The medium-term outlook, however, is mired in uncertainty and highly dependent on how the conflict evolves. At this stage, we think that markets may be getting ahead of themselves in pricing as many as three rate increases this year.