LAGARDE: NOT SEEING MATERIAL RISK OF 2ND-ROUND EFFECTS NOW

ECB President Christine Lagarde stated that the central bank does not currently see a material risk of second-round effects, meaning that higher prices are not yet feeding into broader wage and price-setting behavior that would sustain inflation. The transmission mechanism runs through inflation expectations and the rate path: if policymakers judge that the inflation shock is contained to direct price effects, the case for further tightening weakens, which narrows the euro-area rate differential against markets pricing a more persistent inflation backdrop. Euro-denominated assets, particularly euro-area government bonds and the EUR/USD pair, are most directly exposed, as shorter-dated German Bunds and Italian and Spanish sovereign spreads reprice on expectations for the ECB's policy trajectory. Traders will be focused on the next euro-area flash HICP release and the associated core inflation and services components, since these will determine whether the absence of second-round risk is confirmed by the data or contradicted by sticky underlying price pressures.

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