François Villeroy de Galhau, an ECB Governing Council member and Governor of the Bank of France, said the central bank must be ready to act against second-round effects.
He said there is not enough information yet on core inflation.
At the time of writing, EUR/USD was down 0.08% on the day at 1.1730.
Implications For Ecb Policy
We must be ready for the European Central Bank to intervene against second-round inflation effects. Recent data for April 2026 shows headline inflation ticking back up to 2.8%, reigniting concerns that higher wages are feeding directly into consumer prices. This puts the focus squarely on the ECB’s next move, as their tolerance for overshooting the 2% target is tested.
The picture on core inflation is becoming clearer, and it is not what the market had hoped for earlier in the year. Core inflation, which excludes volatile energy and food prices, has remained stubbornly high at 3.1%. This suggests underlying price pressures are still strong, making it difficult for the central bank to consider further rate cuts.
For derivative traders, this means pricing out the aggressive rate cuts we expected back in late 2025. Interest rate futures should be adjusted to reflect a “higher for longer” policy stance from the ECB. The probability of a rate cut at the June meeting has now fallen below 20%, a sharp reversal from just two months ago.
What It Means For Traders
In currency markets, this hawkish shift makes the Euro more attractive. With the EUR/USD currently trading around 1.0850, traders should consider strategies that benefit from a stronger Euro, such as buying call options. The stark contrast with the 1.1730 level seen years ago highlights how much rate expectations have driven the currency pair.
This heightened uncertainty about the ECB’s path is pushing up implied volatility. We saw a similar dynamic in 2025 when the market was trying to guess the timing of the first rate cut. Traders can use options strategies like straddles to position for a significant market move, regardless of the direction, ahead of upcoming inflation data releases and the next Governing Council meeting.
