Belgium’s central bank governor Pierre Wunsch said the European Central Bank (ECB) could cut interest rates once economic dynamics shift, but kept the door open to further tightening if incoming figures deteriorate. He said he would support a second hike in July if data are “not going in the right direction”, and added that stronger services inflation could justify another 25 bps increase as a safeguard. He also called for conditional guidance on rates and argued there is no need to rush when the data are ambiguous.
In markets, the euro fell, with EUR/USD down 0.21% on the day to 1.1430. The ECB, based in Frankfurt, sets Eurozone monetary policy with a primary mandate of price stability, defined as inflation around 2%, and the Governing Council takes decisions at eight meetings a year. In more extreme conditions it can deploy Quantitative Easing (QE), buying assets after creating euros, a tool used during the Great Financial Crisis in 2009-11, again in 2015 and during the covid pandemic; the reverse policy, Quantitative Tightening (QT), involves halting purchases and reinvestments as recovery takes hold.
Persistent Inflation and Rate Hike Prospects
We believe the European Central Bank is keeping the door open for another rate hike in July. This is because certain inflation components, particularly in services, are proving difficult to control. Recent data supports this view, with services inflation for May 2026 coming in at 4.2%, well above the headline rate of 3.1%.
The central bank’s path is not set in stone, and any decision will depend heavily on the next set of economic figures. We are therefore paying close attention to the upcoming flash HICP inflation estimate for June, as a high number could solidify the case for another hike. This data-dependency suggests that options traders should consider strategies that benefit from increased volatility in the Euro, such as straddles or strangles on the EUR/USD pair.
Market Implications and Trading Strategies
This cautious stance comes despite signs of a slowing economy, with Eurozone GDP growth a meager 0.1% in the first quarter of 2026. We see parallels to past periods where central banks were forced to prioritize fighting inflation even at the cost of short-term economic pain. This makes long positions in the Euro risky until the inflation picture becomes much clearer.
With the EUR/USD currently trading near 1.1430, we see that the market has not fully priced in the possibility of another 25 basis point increase. We believe there is value in buying short-term interest rate futures that would profit from a surprise hike at the July meeting. Alternatively, traders could use call options on the Euro to gain upside exposure with a defined risk if the bank decides to hold rates steady.
