The European Central Bank (ECB) President mentioned that the services sector is experiencing a slowdown. Survey data indicates weaker prospects in the near term.

Higher tariffs and a stronger euro are expected to make exports more challenging. Investments in defence and infrastructure are projected to support economic growth.

Economic Growth and Inflation

These investments could lead to increased inflation over the medium term. Risks to growth remain skewed towards the downside, without a predetermined rate path.

The ECB feels well-positioned to handle upcoming uncertainties, despite differing opinions among members. Discussions about the neutral rate have not yet taken place.

Confidence is expressed in the current rate path and in the completion of the ECB President’s term. The euro has risen following the press conference due to a generally weakening US dollar.

At its root, the article signals a cooling in one of the euro area’s most resilient sectors — services — with recent surveys showing less optimism ahead. This deceleration follows a period where services had been a reliable counterbalance to sluggish goods-producing industries. Now, with both weakening on some level, forward momentum looks compromised.

Adding some weight to the downside, the euro’s strong showing, combined with trade restrictions in the form of rising tariffs, introduces fresh hurdles for exporters in the bloc. A stronger currency tends to squeeze overseas demand, making eurozone goods more expensive on the global stage. Meanwhile, policy initiatives focusing on infrastructure and defence suggest that growth will not be entirely left adrift. These outlays are often long-dated and sticky, meaning they can sustain some level of activity even while private-sector momentum softens.

Still, public-led spending has a cost. Over time, this kind of targeted outflow tends to lean inflationary — especially if spare capacity in the economy remains limited. In this context, the risk of stimulus spilling over into broader price pressures grows, something we should watch as inflation expectations persist above target. That said, the medium-term view from central bankers shows no urgency to deviate from the path already laid out. There is a widely shared sense that, barring another large shock, rate moves can proceed at a deliberate pace. However, there’s no commitment to any fixed series of steps.

Internally, views diverge — not on whether conditions have improved, but more so on how restrictive policy needs to remain to keep inflation anchored. No clear consensus has formed on what level would best serve as a neutral rate of interest. This absence of clarity leaves room for market pricing to oscillate around comments or forecasts with little anchoring, so volatility remains likely.

Market Reactions and Expectations

With a more benign US backdrop pushing the dollar down, the euro found room to strengthen after the ECB’s press conference. Markets interpreted the President’s remarks as measured but steady. Although the remarks were balanced overall, traders latched onto the notion that policy would not be aggressively ramped up nor hastily loosened. That helped support the currency, which in turn may drag slightly on growth through trade — making our job trickier.

So, what matters here is how inflation evolves against this backdrop of public investment and external headwinds. While the official tone remains one of confidence, spreads in the front-end of rate markets may still move sharply in response to inflation surprises or energy volatility. At the same time, the absence of concrete discussion on the neutral rate means reaction functions from the policy side could remain fluid — data-dependence is real, not rhetorical.

As the summer calendar brings more data and possibly less liquidity, we prepare for moves that may seem stretched relative to the news. With that in mind, protections and positioning should reflect that newsflow might not always align neatly with price action. At times, the original impulse may come less from economic fundamentals and more from adjustments in rate expectations or currency flows.

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