🇪🇺 ECB HOLDS INTEREST RATES STEADY, WARNS OF RISING INFLATION RISKS

The European Central Bank kept its benchmark interest rates unchanged at its latest policy meeting while warning that the risks to inflation have shifted upward. The hold signals that policymakers are unwilling to ease further while price pressures remain a live concern, which tends to keep short-dated euro rate expectations anchored and limits the scope for a near-term repricing toward cuts. The transmission runs primarily through the rate differential with the Federal Reserve and the Bank of England, where a steady ECB stance can support the euro if markets had been pricing earlier easing, while also weighing on European rate-sensitive equities and the periphery bond spreads that are most exposed to shifts in the expected policy path. Euro area government bonds, particularly two-year Schatz and German Bund yields, along with EUR/USD, are the most immediately exposed instruments, as traders reassess how long the policy rate will stay at its current level. The next catalyst to watch is the euro area flash HICP inflation release, since a upside surprise would validate the ECB's warning and push forward rate expectations higher.

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