European Central Bank President Christine Lagarde signalled in a Sunday Bloomberg interview that policymakers are unlikely to deliver further interest rate cuts at the June 5 Governing Council meeting, despite the IMF's upgraded global growth outlook and the steep retreat in European energy prices. The deposit rate sits at 2.25% following the April 9 cut, and the swap-implied probability of a June reduction fell to 24% Sunday from 58% on Wednesday.
Lagarde flagged that the energy disinflation impulse would have a "significantly different inflation footprint than 2022" given the structural shift to U.S. LNG and Norwegian gas, language that economists at Deutsche Bank and Barclays interpreted as a signal that the ECB sees lower headline inflation as supportive of demand rather than purely deflationary. Eurostat releases preliminary April inflation data on Wednesday, with consensus at 2.1% year-on-year for the headline and 2.4% for core.
Euro Strengthens to $1.118
The euro gained 0.7% to $1.1180 in Sunday trading, the strongest reading since early March, while EUR/JPY firmed to 161.80. German 10-year Bund yields rose 5 basis points to 2.41%, while French OATs climbed 6 basis points to 3.04%. The OAT-Bund spread held steady at 63 basis points, well below the post-Macron-snap-election peak of 88 basis points.
European equities were mixed in pre-market. The Stoxx Europe 50 future gained 1.1% on global risk-on flows, though banking stocks underperformed slightly as the rate-hold signal dampened net interest margin expectations. BNP Paribas (BNP.PA) and Deutsche Bank (DBK.DE) traded up just 0.4% and 0.6% respectively.
Fiscal Coordination Underway
Lagarde also emphasised the importance of "coherent fiscal-monetary coordination," echoing Sunday's announcement of a coordinated EU defence spending framework that would lift NATO members above the 3% of GDP target by 2028. Defence stocks Rheinmetall (RHM.DE) and Saab (SAABB.ST) gained 4.2% and 3.6% respectively.