ECB's Lagarde Cautious on Inflation Despite US-Iran Deal; Markets Eye EURUSD

ECB Signals Caution on Inflation as Geopolitical Tensions Ease

European Central Bank President Christine Lagarde struck a cautiously optimistic tone on Thursday, acknowledging the potential disinflationary benefits of the recent US-Iran memorandum of understanding while underscoring ongoing concerns over domestic price pressures. The diplomatic breakthrough, aimed at de-escalating tensions in the Strait of Hormuz, has already begun to ease energy market fears that had driven oil prices higher in recent months.

However, Lagarde emphasized that the ECB remains vigilant about 'second-round effects,' where initial energy price shocks feed into broader wage and service-sector inflation. This concern directly influenced the bank's latest 25-basis-point rate hike, bringing the deposit rate to 2.25%, as policymakers sought to preemptively counter cost-push inflation risks.

Services Inflation Remains Sticky

The ECB's focus on services inflation reflects its stickiness, driven primarily by wage dynamics rather than commodity inputs. Sectors such as hospitality, transport, and healthcare have shown persistent price growth, complicating the central bank's efforts to normalize policy. Even with potential energy price relief, core inflation pressures could persist if wage growth continues to outpace productivity gains.

Market reaction was swift, with EURUSD futures trimming expectations for further tightening. Pricing now reflects approximately 31 basis points of cumulative rate hikes by year-end, down from 52 basis points prior to the US-Iran deal. The shift highlights trader skepticism about the ECB's ability to pivot aggressively without clearer signs of inflation moderation.

Implications for EURUSD and Risk Sentiment

For EURUSD traders, the key takeaway is that the ECB's hawkish bias remains intact despite geopolitical improvements. A sustained normalization in Hormuz shipping flows could ease supply-chain pressures and support a dovish pivot, but only if services inflation and wage growth show meaningful deceleration. Technical resistance at 1.0850 and support at 1.0700 will likely define near-term price action.

Global risk sentiment remains fragile amid lingering Middle East uncertainty. While the peace deal reduces tail risks, investors are watching for confirmation that energy prices stabilize and core inflation metrics ease in upcoming Eurozone data releases.

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