The European Central Bank (ECB) is expected to keep its deposit rate unchanged at 2.00% during its 30 April policy meeting, according to Standard Chartered strategists Christopher Graham and John Davies, who cite a 'wait-for-data' approach as the Middle East conflict continues to unfold [1]. However, they warn that the risk of a rate hike in June is increasing, particularly if the Strait of Hormuz remains effectively closed, which could exacerbate energy price shocks [1]. April euro area inflation is forecast at 2.9% for the headline figure and 2.2% for core inflation, which is seen as limiting the likelihood of an April rate hike but not ruling out future action [1].
Recent economic data highlights the ECB's dilemma: while headline inflation surged in March due to higher oil prices, core inflation has so far remained insulated, drifting lower, and Purchasing Managers' Indexes (PMIs) unexpectedly fell into contractionary territory in April [1]. Specifically, the euro-zone services PMI declined by 2.8 points to 47.4 in April, while the manufacturing PMI rose by 0.6 points to 52.2, resulting in a composite PMI drop of 2.1 points to 48.6—the weakest level since November 2024 [2]. This composite index has fallen by 3.3 points since February, before the Middle East conflict began, with business confidence deteriorating more rapidly than during the previous energy price shock in early 2022 [2].
The euro has weakened against the pound, with EUR/GBP drifting lower within a 0.8600–0.8800 range as the GBP outperforms the EUR [2]. The pound's strength is attributed to stronger UK economic data and persistent inflation, which have led markets to price in more Bank of England (BoE) tightening [2]. The UK 2-year government bond yield has increased by around 30 basis points from its recent low, compared to a 20 basis point rise in the euro-zone and just over 10 basis points in the US [2]. MUFG analysts see scope for several BoE Monetary Policy Committee members to vote for a hike, keeping EUR/GBP under pressure [2].
ECB President Lagarde is expected to reiterate that it is too early to draw firm conclusions on the economic impact of the energy shock, and may not push back strongly against market expectations for rate hikes, instead emphasizing that the ECB is keeping all options open and stands ready to act if necessary [1].
CONCLUSION
The ECB is maintaining a cautious stance amid rising inflation risks and weakening growth, with the possibility of a June rate hike increasing if energy disruptions persist. Meanwhile, the pound is outperforming the euro due to stronger UK data and expectations of further BoE tightening. Market sentiment remains cautious, with significant attention on upcoming inflation data and central bank policy decisions.