ING economists Michiel Tukker and Benjamin Schroeder say the European Central Bank is likely to retain a hawkish bias, arguing that rate sensitivity to oil should be more muted going forward while uncertainty remains elevated. They do not expect a strong dovish turn from central banks, and point to a policy approach that weighs Middle East risks and the need to assess shocks before committing to changes.
The analysts add that some ECB officials, including Mārtiņš Kazāks, may speak more openly about increased scope for a wait-and-see stance, which would reduce the odds of a July hike. Even so, they expect the ECB to keep the narrative of at least one more hike, using it as a risk-management tool rather than abandoning it outright. The piece also states it was created with the help of an Artificial Intelligence tool and reviewed by an editor.
ECB Policy Response to Inflation and Geopolitical Risks
We have to acknowledge that the sensitivity of rates to oil will likely be more muted, but we don’t expect a strong dovish turn from the European Central Bank. The narrative of at least one more rate hike will probably be kept alive for risk management purposes. Amid high uncertainty, keeping a hawkish bias simply makes sense.
This stance is a direct response to stubborn inflation, with the latest Eurostat data from May 2026 showing core inflation at 2.8%. This remains significantly above the 2% target, giving policymakers little room to signal an end to tightening. We see this justifying their caution before committing to any new policy direction.
Furthermore, geopolitical tensions continue to influence energy prices, with Brent crude trading around $95 a barrel this month. Christine Lagarde will likely highlight these risks and the need to assess shocks before acting. This supports the case for a wait-and-see approach, diminishing the odds of a hike in July but keeping one on the table for later.
Market Implications and Trading Strategies
For traders, this means volatility in short-term interest rate markets should stay elevated. We believe positioning for higher rates through selling EURIBOR futures or buying interest rate caps offers a sound strategy. The uncertainty will keep option premiums supported in the coming weeks.
Looking at market pricing, Overnight Index Swaps now reflect a 60% chance of a 25 basis point hike by the September 2026 meeting. This shows the market is taking the “one more hike” narrative seriously. This is similar to the 2022-2023 period, where central banks used forward guidance to manage inflation expectations even as growth slowed.
In the currency space, this hawkish tilt should provide a floor for the Euro, especially against currencies with more dovish central banks. We think strategies like buying EUR call options against the US Dollar or Japanese Yen are prudent. This ECB stance creates a clear policy divergence that can be exploited.
