On May 13, the Federal Reserve's officials tend to downplay the impact of rising energy prices on inflation and monetary policy. For instance, Federal Reserve Chair Powell stated at the last press conference that high oil prices would only push up overall inflation in the short term, and no officials are currently calling for a rate hike.
If high oil prices persist, short-term inflationary pressures could evolve into long-term high inflation risks. The European Central Bank's officials appear to have a higher risk awareness than the Fed. For example, ECB's Nagel indicated that if the effects of such (energy) shocks prove to be significant or persistent—particularly if they threaten to de-anchor long-term inflation expectations—then we must act (by raising rates) in line with our mandate.
Nagel's remarks were made around 15:49 yesterday. Since they hinted at a potential rate hike in June, they theoretically should have provided a boost to the euro. The chart above shows the five-minute price movement of EURUSD during Nagel's speech. In the ten minutes from 15:50 to 16:00, the price did rise, but the increase was only 5 basis points, which is relatively small. In the following hours, EURUSD remained in a sideways consolidation pattern without a clear bullish or bearish bias.
The ECB's current benchmark interest rate is 2.15%. It has remained unchanged for nearly a year since the last rate cut in June 2025. A rate of 2.15% falls within the neutral interest rate range. If inflation and unemployment do not experience extreme changes, the probability of the ECB raising or lowering rates again is relatively low.
Looking at the German government bond yield market, the three-month bond yield is 1.98%, and the six-month bond yield is 2.28%. The 0.3 percentage point gap between them suggests that the ECB is likely to raise rates at least once in the second half of the year. ECB Governing Council member Nagel believes the timing for a rate hike could be in June, which is the next interest rate decision meeting.
The probability of an ECB rate hike is increasing, while the likelihood of a Fed rate hike is decreasing, especially after Kevin Warsh assumed the role of Fed Chair. This divergence in monetary policy could very likely lead to an appreciation of the euro against the US dollar. The risk lies in the fact that although both the US and the Eurozone face high inflation risks, the US labor market shows signs of recovery, while the Eurozone's macroeconomy remains burdened by issues related to Russia and Ukraine. Whether international capital has sufficient confidence to hold euros remains uncertain.
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