We have changed our ECB call and now expect two 25bp hikes delivered in April and June, respectively, bringing the deposit rate to 2.50%. The comments from the ECB’s GC members have been significantly more hawkish compared to Lagarde’s view at the last monetary policy meeting. This makes the call for a total of 50bp hikes by YE 2026 more likely than ECB remaining at 2.00% although the latter can certainly not be ruled out. Our call is highly contingent on the developments of the war in Iran, so we present three scenarios for the ECB’s deposit rate path in 2026 and 2027 in Reading the Markets EUR – New call: two 25bp hikes in April and June, 27 March.
This week provided the first hints that US President Donald Trump is starting to look for an exit of the Iran war. But also, that he is still considering “a final decisive blow”. The mixed news left markets in another rollercoaster pattern. Trump said on Monday, US would not hit Iranian energy infrastructure for five days and was talking with Iran, which caused oil prices to drop below USD100 per barrel after hitting close to USD120 per barrel last week. On Thursday he prolonged the deadline by 10 days referring to good talks. Axios reported during the week that US is weighing options for a “final blow” in Iran that may include ground forces and a major bombing campaign. However, WSJ also reported that Trump had told advisers he wanted an end to the war soon, and he announced new dates for his trip to China, 14-15 May. The trip was supposed to take place next week but was delayed due to the war. Trump’s approval rating is declining by the day, and high gasoline prices is starting to hurt. Even if Trump is looking for an exit and does not escalate further it is not clear that Iran is willing to back down and reopen the Strait of Hormuz. And should Trump decide on putting ‘boots on the ground’ the probability of escalation goes up significantly.
We see a risk that the conflict drags out beyond the 4-6 weeks that Trump has aimed for from the outset. Uncertainty is of course unusually high, and many scenarios are in play, both for the war and the global economy. Oil markets are currently priced for a fairly quick resolution of the war with oil futures pricing a decline from just below USD110 per barrel at the time of writing to USD 90 by late summer and USD85 by the end of the year.
Financial markets have generally followed the ebbs and flows in the Iran war with equities higher on Monday when oil prices dropped but moving broadly sideways in a see-saw pattern for the rest of the week. Bond yields and the USD have followed a similar pattern.
On the data front PMIs for March were in the spotlight, not least as a first sign of the impact of the Iran war. Euro PMIs were mixed with manufacturing holding up well while services took a hit with a decline from 51.9 to 50.1. The price indices moved sharply higher lifted by the rise in energy prices.
Next week, developments in the Iran war will continue to be the main market driver but we also get key US labour market data with the JOLTS job openings, Challenger job cuts ahead of the main release, non-farm payrolls on Friday. In the euro zone, Flash CPI for March, released Tuesday, will be in focus. Germany will publish March CPI numbers on Monday.
