ECB Minutes: Peak Impact of Euro Strength on Inflation Yet to Come 🇪🇺

The ECB minutes failed to have any significant effect on the EURUSD rate, as the release reiterated the balanced ECB stance on tamed inflation and resilient growth momentum, which are becoming obsolete due to the newly emerged war in the Middle East.

Source: xStation5

The minutes emphasize the euro’s previous persistent appreciation, driven by its emerging safe-haven status and structural confidence. However, this strength poses a growing challenge for a trade-sensitive Eurozone. While the peak disinflationary impact from the 2025 rally is still pending, the balance of risks has fundamentally shifted following the Iran conflict.

The euro is increasingly behaving as a risk currency vulnerable to energy shocks. With rates projected to stay on hold through 2027, the ECB must now balance historical FX resilience against the new reality of energy-driven inflation.

You can find the breakdown of most important matters below:

Outlook for Inflation

• Upward Revisions: Inflation fixings (HICP excluding tobacco) have been revised upward since December 2025, primarily due to higher oil and industrial metal prices.

• Projections: Inflation is expected to hover around 1.8% for the second half of 2026 (approximately 1.9% when including tobacco).

• Drivers: Higher energy and industrial metal costs added up to 30 basis points to inflation compensation, while the appreciation of the euro had only a modest dampening effect on the outlook.

• Target: The Governing Council remains committed to returning inflation to its 2% target in the medium term.

Economic Growth and Activity

• Global Resilience: Global growth momentum remains resilient, surprising on the upside in late 2025 and expected to stay stable at slightly over 3% through 2026 and 2027.

• Euro Area Confidence: confidence in the Eurozone has been bolstered by a major German fiscal package (announced in March 2025) which is expected to support potential output growth through increased public investment.

• Trade Deceleration: Despite overall growth, world trade is expected to decline substantially in 2026 due to the adverse impact of tariffs and high policy uncertainty.

Euro:

• Drivers of Strength: The euro appreciated 1% against the USD since the previous meeting, though this was attributed to USD weakness (driven by US-specific risk shocks) rather than internal euro strength.

• Safe Haven Status: The euro is increasingly perceived as a "safe haven" currency, particularly during periods of geopolitical crisis or US tariff threats.

• Lagged Impact: The "peak disinflation effect" from the significant euro appreciation seen in mid-2025 has not yet been reached and is expected to play out over the next three years.

• Competitiveness: It was noted that despite nominal stability, the persistent strength of the euro since early 2025 has made European exporters less competitive.

Risks and Uncertainties

• Tariffs and Trade: High policy uncertainty and the threat of global tariffs remain the primary risks to global trade growth in 2026.

• Exchange Rate Sensitivity: The Eurozone is particularly sensitive to exchange rate fluctuations given its status as a major global trading region.

• Geopolitical Tensions: Rising geopolitical tensions have led to a sharp rally in EU defense stocks, though tariff-sensitive sectors continue to underperform.

Monetary Policy Path

• Interest Rates: The ECB is expected to keep interest rates unchanged throughout 2026 and likely 2027; market pricing suggests a full 25 basis point hike may not occur until early 2028.

• Approach: The Governing Council maintains a data-dependent, meeting-by-meeting approach, retaining the option to adjust the future rate path if the environment changes.