ECB's Kazaks Signals Readiness to Act Again on Inflation Despite US-Iran Deal

ECB Maintains Hawkish Stance on Inflation

European Central Bank (ECB) policymaker Martins Kazaks stated that inflation risks in the Eurozone remain tilted to the upside, even as the recent US-Iran memorandum of understanding has reduced near-term energy price pressures. His comments come days after the ECB raised its key deposit rate by 25 basis points to 2.25%, targeting inflationary threats linked to the Middle East conflict and energy costs.

Geopolitical Relief vs Persistent Inflation Concerns

The US-Iran deal, expected to be finalized on Friday, has alleviated fears of prolonged disruptions to the Strait of Hormuz, leading to expectations of lower energy prices. However, Kazaks emphasized that the ECB's focus has shifted from immediate energy shocks to broader second-round effects, particularly in the services sector. This aligns with ECB President Christine Lagarde's warnings about persistent inflationary pressures beyond energy markets.

Gradual Approach Amid Reduced Urgency

Kazaks noted that the ECB can move gradually, suggesting a potential pause in rate hikes to assess evolving economic data and energy price dynamics. While geopolitical tail risks have diminished, the ECB remains cautious about the risk of entrenched inflation expectations. Markets may see incremental policy tightening if inflation fails to cool convincingly in the coming months.

Implications for EURUSD and Traders

The ECB's hawkish rhetoric supports the euro's near-term outlook, with EURUSD likely to remain sensitive to upcoming inflation data and ECB communications. Traders should monitor the Eurozone services PMI and wage growth indicators for signs of second-round effects. A sustained decline in energy prices could prompt a dovish pivot, but the ECB's current stance suggests further rate hikes remain on the table if needed.

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