ECB's Rehn: No Second-Round Inflation Effects Yet, Rate Path in Focus

ECB's Rehn Dismisses Second-Round Inflation Risks

European Central Bank Governing Council member Olli Rehn stated on Thursday that he is not observing second-round inflation effects in the eurozone economy. This remark, delivered during a public appearance, offers a key insight into the ECB's current thinking on inflation dynamics.

Second-round effects refer to the indirect impact of rising prices on wages and business costs, which can create a self-reinforcing cycle of inflation. Rehn's assessment suggests that, so far, the eurozone has avoided such a spiral, despite earlier surges in energy and food prices. The absence of these effects is a crucial condition for the ECB to consider easing monetary policy.

The eurozone's inflation rate has fallen from its double-digit peak in late 2022, but progress has been uneven. Core inflation, which excludes volatile food and energy prices, has remained stubbornly above the ECB's 2% target. Rehn's comments indicate that policymakers see the risk of a wage-price spiral as contained, which could pave the way for rate cuts later this year if data continues to improve.

What's Driving the ECB's Cautious Optimism?

Wage Growth Shows Signs of Cooling

Recent data from the eurozone indicates that negotiated wage growth may be moderating. The ECB has closely monitored wage agreements to gauge whether workers are demanding higher pay to compensate for past inflation. While wages are still rising, the pace appears to be slowing, reducing the likelihood of a persistent inflation cycle. This aligns with Rehn's view that second-round effects are not materializing.

Additionally, corporate profit margins have absorbed some of the cost pressures, limiting the pass-through to consumer prices. If wage growth continues to decelerate, the ECB may gain confidence that inflation will return to target without further rate hikes.

Inflation Expectations Remain Anchored

Market-based and survey-based measures of inflation expectations have remained relatively stable, hovering near the ECB's 2% target over the medium term. This suggests that businesses and households trust the central bank's ability to control inflation, reducing the risk of expectations becoming unmoored. Rehn's remarks reinforce this narrative, as anchored expectations are a prerequisite for price stability.

However, external shocks, such as geopolitical tensions or energy supply disruptions, could quickly alter the outlook. Traders should monitor these risks, as they could revive inflationary pressures and force the ECB to reconsider its stance.

Key Indicators to Watch for ECB Policy Clues

Traders will focus on upcoming eurozone data releases to confirm whether the disinflation trend is sustainable. The next round of negotiated wage data, due later this month, will be particularly important. A significant slowdown in wage growth could bolster the case for rate cuts, while an acceleration might delay any easing.

Core inflation readings, especially the flash estimates for the current month, will also be scrutinized. A continued decline toward 2% would support Rehn's assessment and increase the probability of a dovish pivot. Additionally, the ECB's own projections, released quarterly, will provide updated forecasts for growth and inflation, offering further guidance on the policy path.

For real-time price action, keep an eye on EUR/USD and eurozone bond yields, as they tend to react swiftly to ECB commentary and data surprises.

Implications for Traders and ECB Policy Outlook

Rehn's comments suggest that the ECB is gradually shifting from a tightening bias to a neutral stance, with the next move likely to be a rate cut rather than a hike. However, the timing remains uncertain and data-dependent. Traders should avoid assuming an imminent cut, as the ECB has repeatedly stressed that decisions will be made meeting by meeting.

From a trading perspective, this environment favors strategies that benefit from lower volatility in interest rates. For instance, carry trades in euro crosses may become more attractive if the ECB signals a prolonged pause. Conversely, if inflation proves stickier than expected, the euro could strengthen on expectations of higher-for-longer rates. Using technical indicators such as moving averages and RSI can help identify momentum shifts in EUR/USD.

It's also crucial to consider the Fed's policy path, as divergence between the ECB and the Federal Reserve can drive currency movements. If the Fed cuts rates more aggressively than the ECB, the euro could appreciate. Traders can share their views and strategies in VNIX signal rooms to gauge market sentiment.

Risk management is paramount. Given the event-driven nature of central bank communication, positions should be sized to withstand potential spikes in volatility. Beginners can learn more about managing risk in our classroom.