Insights 
VT 
Europe cannot afford self-complacency. Geopolitical and energy market developments need careful monitoring. The trade war is more likely causing a reduction in inflation in the Euro Area rather than increasing it.
The European Central Bank has reached the mid-point of its neutral interest rates band, set between 1.75% and 2.25%. There is a possibility of one final cut to the lower band, but a pause is expected until September to assess summer data.
Market Expectations
The market anticipates a 25 basis points cut in December.
The earlier segment points to a few direct and fairly grounded takeaways. It tells us that inflation in the Euro Area is not being pushed upward by trade tensions, which runs counter to older assumptions. Instead, these trade disruptions seem to be easing price pressures, perhaps due to weakened demand or shifts in supply chains. This undercuts fears that external conflicts might spill over into domestic inflation. Not a complete relief, but certainly something to make note of.
Monetary policy-wise, the European Central Bank’s (ECB) neutral rate band has now been effectively encountered — parking the policy rate in the 1.75% to 2.25% territory. We’re situated right at the middle of it. The suggestion of one more reduction remains tentative and restrained, and a clear pause appears to be the base case over the summer months. We now sit in a period where waiting becomes the sensible course of action. The goal here is to allow the economic data to speak for itself through June, July and August, before any further recalibration.
Monitoring Economic Indicators
Markets have priced in one more cut, modest at 25 basis points, with expectations pinned to December. They’re not showing signs of panic, which may be a cue of some confidence in the trajectory established by policy-setters.
For those of us engaged in rate-sensitive instruments, this tells us to sharpen timing. Volatility will likely fluctuate more around data releases than overarching policy shifts over the immediate term. That means macro indicators covering core inflation and wage pressures—particularly in Germany and France—should be watched more carefully than central bank communications, which are likely to be subdued until September. When Lagarde backs into silence, we know to turn to numbers.
Schnabel has been hinting at lagging transmission into credit conditions. That’s our cue to examine term structure pricing on forward swaps. The next rotation may not come in a single moment, but in a gradual repricing from summer through autumn. Carry strategies need adjusting if we’re running long duration risk aligned with assumed September action. That’s no longer a smart default.
Until the September pause is resolved—whether into action or inaction—the short end will likely resist large moves. But edges might be found on peripheral spreads and cross-currency swaps if regional growth data starts diverging more clearly. Southern European economies keep showing more resilience than typical during tightening phases, which might create new angles on sovereign curve steepness.
And let’s not discount energy entirely. Simkus and his team continue to flag energy market pressures as unpredictable, but that adds directional bias only in the case of sharp moves. Stable prices can still hold inflation down without prompting a policy turn. Take that into account when stress-testing forward guidance.
We are in a time of fewer moves—but finer moves. That means shaping exposures that reward patience, not speed. Let the bigger stories settle before the portfolio does.
