How far will the ECB go?

STOXX Europe 600  +1.04%  to 631.63

German 10-year Bund yield  -9.5  basis points to 2.948% 

Spot gold  +1.37%  to $4,570.56 an ounce

DXY  -0.35%  to 98.97  

Key data to move markets today

EU: A speech by Dutch Central Bank President Olaf Sleijpen

US: Housing Price Index, Consumer Confidence, Dallas Fed Manufacturing Index and a speech by Minneapolis Fed President Neel Kashkari

JAPAN: BoJ Governor Kazuo Ueda’s speech

Global Macro Updates

ECB set to raise inflation forecasts as June rate hike looms. ECB appears to be increasingly likely to raise interest rates at its 11 June meeting. According to a Bloomberg news report, President Christine Lagarde confirmed the bank's March inflation projection of 2.6% for 2026 will probably be revised higher. She told Italian talkshow Che Tempo Che Fa that the situation ‘has evolved’ since forecasts were published, just days after the Iran war began.

Her comments on inflation align with the growing chorus from the ECB Governing Council. ECB Council Member Martin Kocher said everything points to a decision between holding and raising rates in June, adding that lack of improvements in Iran will focus discussions on acting. Fellow ECB Council Member Alexander Demarco had already described the March forecasts as potentially too optimistic. Even traditionally dovish voices are conceding a hike may be the most likely outcome, with markets and economists pricing at least two 25 bps increases before year-end.

The data backdrop supports a hawkish tilt. Goldman Sachs projects eurozone headline HICP rising to ~3.3% in May, with energy inflation running at 11.9% y/o/y, and sees headline peaking at 3.4% in Q4 2026. That said, President Lagarde stopped short of pre-committing to a June action, stressing that uncertainty remains high and that the ECB's medium-term 2% target remains the anchor.

The repricing of ECB expectations has been felt sharply across European fixed income markets, where the past two weeks have brought exceptional volatility. Germany's 10-year Bund yield climbed to 3.193% on 19 May, approaching levels last seen in May 2011. As a result, traders moved to price three ECB hikes by year-end, with markets now assigning over 86% probability to a first increase at the June meeting. The front end has been particularly sensitive: the 2-year Bund yield reached 2.767% on 19 May, its highest since July 2024. Peripheral spreads also bore the brunt of the repricing, with the Italian 10-year yield briefly touching 4.070% on 27 March before partially retracing. For asset allocators, the current yield configuration argues for a considered tilt toward high-quality euro investment-grade credit and core sovereign exposure at the shorter end, e.g., in the 2- to 5-year segment, where carry and rolldown remain potentially compelling as it does not involve taking on excessive duration risk.

On the currency front, the hawkish ECB pivot has provided support to the euro, though its expression has been uneven across pairs. Against the US dollar, it has drifted toward $1.1641 as of 25 May, with the single currency constrained by resilient US growth dynamics and a FOMC that remains in no hurry to ease. Against the yen, however, the picture is markedly different: the euro has held firmly above ¥185 per euro, a multi-year high, as the ECB and BoJ policy divergence continues to reinforce the pair's carry appeal. With the BoJ maintaining its policy rate well below European levels and flagging caution around premature tightening, the interest rate differential continues to favour the euro, and carry trades funded in yen remain intact barring a major risk-off episode.

In European equities, sector selectivity is increasingly the primary source of alpha. Defence and capital goods names continue to benefit from a durable fiscal tailwind, with European governments accelerating defence budgets and infrastructure programmes. Healthcare offers a complementary layer of resilience, characterised by stable earnings, limited sensitivity to rate cycles and pricing power relative to energy-driven inflation. Analysts highlight quality-oriented allocations in financials, healthcare and select industrials as preferred positioning in an environment of rising rates and persistent geopolitical risk premium. Taken together, these sectors create a balanced barbell: structural growth and fiscal support on one side, and defensive earnings stability on the other, offering both resilience and opportunities for selective alpha generation.

US Stock Indices

US markets were closed in observance of Memorial Day

European Stock Indices

CAC 40 +1.76%
DAX +2.01%

UK markets closed in observance of the Spring Bank Holiday

Commodities

Gold spot +1.37% to $4,570.56 an ounce
Silver spot +3.42% to $78.08 an ounce
West Texas Intermediate  -6.92% to $90.30 a barrel
Brent crude -7.42% to $96.30 a barrel

Gold prices rose by more than one percent on Monday, while spot silver advanced +3.42% to $78.08 an ounce. 

Spot gold increased +1.37% to $4,570.56 an ounce in subdued trading, as US markets were closed for the Memorial Day holiday. Despite the gain, gold remained -18.31% below its record high of $5,594.82 reached on 29 January.

In contrast, oil prices fell by more than six percent as optimism increased that Washington and Tehran were moving closer to a peace agreement that could eventually reopen the Strait of Hormuz, although both sides downplayed the likelihood of an immediate breakthrough. 

Brent crude futures declined by $7.72, or -7.42%, to $96.30 a barrel, while US WTI crude fell by $6.71, or -6.92%, to $90.30. Trading volumes remained light owing to the US holiday.

According to an official briefed on the visit, Iran’s top negotiator and foreign minister were in Doha on Monday for discussions with Qatar’s prime minister regarding a potential agreement with the US aimed at ending the three-month-old war. Both parties indicated that progress had been made on a memorandum of understanding that would pause the conflict and allow negotiators 60 days to reach a final settlement. Iran’s foreign ministry added that the current talks were focused on ending the war and did not include nuclear issues.

Even if a peace agreement is reached, analysts expect that normal oil flows through the Strait of Hormuz will not resume for several months, as damaged oil and gas infrastructure will require repairs. Recent ship-tracking data showed that three liquefied natural gas tankers transited the strait en route to Pakistan, China and India, while a supertanker carrying Iraqi crude for China also passed through after having been stranded for nearly three months.

Note: As of 4 pm EDT 25 May 2026

Currencies

EUR  +0.34% to $1.1641
GBP  +0.57% to $1.3503
Bitcoin  +1.82% to $77,293.67
Ethereum  +1.84% to $2,114.52

The US dollar weakened against major currencies on Monday in thin holiday trading, as public holidays across the US, Hong Kong, UK and much of Europe reduced market liquidity.

The euro rose +0.34% to $1.1641, while sterling gained +0.57% to $1.3503. The US dollar index fell -0.35% to 98.97.

Against the yen, the dollar fell -0.16% to ¥158.94. In Japan, Prime Minister Sanae Takaichi said the government would add $19 billion to reserves to subsidise fuel costs and ease cost-of-living pressures. She also sought to reassure bond markets by pledging that the supplementary budget would not result in additional overall borrowing.

Market participants are now focused on key data releases later this week, including the US ADP employment report on Tuesday and euro area confidence surveys on Thursday.

Fixed Income

US markets were closed in observance of Memorial Day
German 10-year Bund -9.5 basis points to 2.948%
UK markets closed in observance of the Spring Bank Holiday

Euro area government bond yields fell to their lowest levels in a month on Monday, as investors modestly adjusted expectations for the ECB’s policy path.

Money markets priced the ECB deposit rate at close to 2.60% by December, down from 2.67% late on Friday, compared with the current rate of 2.00%. They also indicated a 75% probability of a first rate increase next month.

In Germany, the two-year yield, sensitive to policy-rate expectations, fell -9.1 bps to 2.556%, its lowest level since 7 May.

Germany’s 10-year government bond yield declined -9.5 bps to 2.948%, its lowest since 8 April, while the 30-year yield fell -7.6 bps to 3.496%, indicating a broad rally across the curve.

In Italy, the 10-year government bond yield fell -10.5 bps to 3.662%, its lowest level since 18 March.

The spread between 10-year Italian BTPs and German Bunds stood at 71.4 bps.

Separately, Bank of Greece Governor Yannis Stournaras said that if euro area inflation were to overshoot the target temporarily, but significantly, monetary policy should be adjusted cautiously in a more restrictive direction.

Note: As of 4 pm EDT 25 May 2026

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