Falling oil prices have reduced the risk of persistent inflation and prompted
traders to pare ECB tightening bets; since April markets have, for the first
time, stopped fully pricing a 25bp ECB hike by end-2026. Two weeks ago, ahead of
the ECB lifting the deposit rate to 2.25%, the 25bp move had been fully priced.
Two-year euro-area inflation swaps have fallen from above 3% in April to below
2.2%. Mizuho multi-asset strategist Evelyne Gomez-Liechti said market testing of
hike expectations is reasonable, though some ECB officials remain cautious and
have not ruled out further tightening. Economists say if next week’s euro-area
inflation prints meet forecasts, June YoY headline inflation would ease to about
3.1% from May’s 3.2%, further reducing pressure on policymakers.
