We believe the ECB will leave rates unchanged at its 23 July meeting, despite the reescalation of the US-Iran war since 7 July. We continue to believe that ECB will hike by 25 bps in Sep meeting and be done with the rate hike cycle. Markets currently price around 45bp of cumulative hikes in H2 2026; assuming a similar amount is priced going into the July meeting, we would expect marginally less to be priced by the end of the press conference. Recent ECB speak is supportive of a July hold in rates, even by the hawks. We believe that ECB market pricing at any time remains an oil trade. So, if oil continues to trade north of $85-90 levels on Brent in REMCY26, we can’t completely rule out Dec hike. But that is not our base case as of now. We believe Mme Lagarde will urge caution and underscore that uncertainty is elevated, indicating the impact on the Euro area economy depends entirely on the duration and intensity of the conflict, neither of which are clear at this stage. Mme Lagarde will likely want to deliver as neutral a message as possible. We do not have any strong views on Euro as of now but might like to receive 2 yr ESTR around 2.75 levels if available just before the policy event on 23rd July.
