Tomorrow's ECB meeting might be the start of the phase "recalibration". Mme Lagarde will likely want to deliver as neutral a message as possible. Wth markets pricing two to three rate hikes by December 2026, we believe the bar is high to ‘outhawk’ markets. Markets currently price around 46bp of cumulative hikes in H2 2026; assuming a similar amount is priced going into the June meeting, we would expect marginally less to be priced by the end of the press conference. Tomorrow's ECB rate hike would be to ensure that medium-term consumer inflation expectations do not drift higher and de-anchor, and hence is for signalling purposes. We also believe the ECB’s view on the upper bound for neutral has likely shifted higher (it was previously 2.25% on the narrow band version), which means the ECB could feasibly justify a couple of rate hikes as a signal that it won’t leave inflation expectations or inflation unchecked without adversely affecting economic growth. We expect Mme Lagarde to reiterate the ECB will not allow a repeat of the rise in HICP inflation stemming from the 2022 European energy crisis. Our own view is ECB might hike twice by 25 bps in tomorrow’s & Sep meetings. We like to receive 2yr ESTR around current levels of 2.62 and expect TP of 2.40 levels with a stop at 2.80. This trading view flows from our argument that ECB might find it difficult to out hawk the current market pricing of 71 bps hike in total in REMCY26. The task cut out for Mme Lagarde tomorrow is to preserve the possibility of another hike by reiterating factors that could still require one, while stopping short of signalling that another increase is likely.
