- The ECB hiked policy rates by 25bp as expected, bringing the deposit rate to 2.25% at the June meeting.
- Lagarde highlighted the robustness of the decision to hike rates across a range of scenarios, downplayed growth risks, and emphasised upside risks to the inflation outlook.
- We now expect the ECB to deliver its second hike in September (prev. July). We maintain our call for two cuts in H1 2027.
For the first time since September 2023, the ECB hiked its policy rates by 25bp, bringing the deposit rate to 2.25%. The decision was motivated by the war in the Middle East “generating inflation pressures” highlighting that “the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.” Even in a “mild scenario” where energy prices decline significantly more than implied by current futures, inflation is expected to average 1.8% y/y in both 2027 and 2028 with core inflation above 2%. With a primary objective of maintaining price stability, the ECB are thereby assessing that monetary policy needs to be tightened.
The market reacted to the new staff projections by sending European yields higher as the new staff projections showed higher inflation but only slightly lower growth (see chart). For 2026, GDP growth is seen at 0.8% y/y (from: 0.9%) and inflation at 3.0% y/y (from: 2.6%) with core at 2.5% (from: 2.3% y/y). As euro area GDP fell 0.2 % q/q in Q1 due to distortions of the Irish export data the ECB staff decided to use a modified measure of GDP for Ireland reflecting only domestic demand. For this reason, GDP growth is holding up much better than we had anticipated based on the “official” measure of GDP. As the staff projections include market expectations of around 75bp worth of hikes and only then see inflation back at 2.0% in 2028 while growth is still holding up relatively well, we expect the ECB to deliver a second hike. However, as we also expect growth to disappoint relative to their expectations even on the modified measure, we do not expect more than two hikes to be delivered.
During the press conference, Lagarde repeatedly highlighted that this was not simply an “insurance” hike and that the interest rate decision was robust across the four scenarios, which now also includes a “milder scenario” to reflect the two-sided risk picture. While highlighting that some measures of underlying inflation had increased, the ECB was confident that they were not seeing second round effects yet, while also downplaying the importance of the latest high services reading in May. This led markets to push European rates back to levels prior to the decision.
To us, it was striking how little downside risks to the growth outlook were mentioned given the weakness that has already been evident across various measures the past months. Lagarde repeatedly emphasized that the ECB has a “price stability mandate” to mitigate a broadening of the energy shock. She said that the main risk to growth would be the ECB not taking a decision to hike as inflation would then increase too much thereby prompting an even large tightening later. This confirms the ECB’s bias towards curbing upside inflation risks rather than addressing downside growth risks, which is one reason for why we expect another 25bp hike.
We update our ECB call and now expect the ECB to deliver its second hike in September (prev. July). Growth data has disappointed lately and wage growth is falling faster than expected. At the same time, the energy shock is propagating at a normal speed which gives the ECB more time to assess any indirect and second-round effects before embarking on a second hike. Ahead of the July meeting, there will also be limited further data releases with only one inflation release for July and one official PMI release, although the GC will likely also have access to the July report. The wait-and-see approach in July was also confirmed in sources stories following the press conference.
We emphasize the risk that ECB might deliver the second hike already in July if the war in Iran escalates or the increase in services inflation we saw in May was indeed not due to an idiosyncratic factor related to seasonality but a more broad-based pickup in inflation. We stress that the decision of a hike in July or September does not significantly affect the economic outlook nor our overall view on rates markets where we still favour playing the move for lower short-end swap rates.
Editorial note: This recovered market brief has been cleaned and reclassified by Next Move Markets for educational market intelligence. It is not investment advice.
Next Move Markets desk view
For active traders, this brief should be read through the lens of currency markets rather than as a standalone headline. The key question is whether the theme behind ECB Review: A Robust Hike, One More to Come can influence positioning beyond the first reaction. That means watching central-bank expectations, yield differentials, dollar momentum and risk appetite together, not in isolation.
A richer trading read comes from separating the catalyst from confirmation. The catalyst explains why markets are paying attention; confirmation comes from price action, liquidity and cross-asset behavior after the headline is digested. If those signals do not align, traders should treat the move as fragile and keep risk tighter.
What traders should watch next
- Whether the move is confirmed by the U.S. dollar index and short-term rate expectations.
- How London and New York liquidity react once the initial headline risk is absorbed.
- Whether price action respects the latest support and resistance zones instead of fading immediately.
- Any follow-up comments from central-bank officials or data releases that change the rate path.
Risk context
This article is a market-intelligence brief, not a trade recommendation. Before acting on the theme, traders should define invalidation, position size and the time horizon of the setup. The same headline can support a short-term reaction and still fail as a multi-session trend if liquidity, policy expectations or broader sentiment move the other way.
Scenario map
The base case is that traders keep this theme on the radar while waiting for confirmation from central-bank expectations, yield differentials, dollar momentum and risk appetite. A stronger continuation scenario requires follow-through after the first reaction, preferably with related assets moving in the same direction. A failure scenario develops if the headline is quickly absorbed, volatility fades and price returns inside the previous range.
For currency markets, the most useful approach is to compare the article theme with live market behavior. If the market confirms the narrative, pullbacks can become more constructive. If the market rejects it, the headline becomes background noise rather than a trading driver.
Execution discipline
- Define the level first: traders should know where the idea is invalidated before thinking about upside or downside.
- Separate news from setup: ECB Review: A Robust Hike, One More to Come may explain attention, but entry quality still depends on timing, liquidity and risk/reward.
- Watch confirmation: a clean move usually appears across related markets, not only in one isolated instrument.
- Control exposure: if volatility expands, smaller position sizing can be more professional than chasing the headline.
Next Move Markets treats this kind of brief as a starting point for preparation: identify the driver, map the scenarios, then wait for the market to prove which path is actually being priced.
