Commerzbank’s Rates Strategist Hauke Siemßen argues that recent Oil-driven moves in Euro rates have given way to ECB-driven repricing. Comments from Kazimir and Schnabel have led forwards to discount a first 25 bp ECB rate hike by July, even as Commerzbank still forecasts no hikes this year. The bank expects markets to keep pricing adverse scenarios while hawkish rhetoric persists.

Hawkish rhetoric shifts market focus

"Yesterday's short-end driven sell-off was thus mostly driven by changing expectations about the ECB's reaction function, triggered by Kazimir's comments that a rate hike may happen "sooner than anticipated"."

"Schnabel added fuel to the fire in the afternoon, indicating upside risks to the ECB's March inflation forecasts."

"This adds further question marks to the question whether the ECB will look through elevated inflation rates, prompting forwards to price to first 25bp rate hike by July."

"We stick to our assessment that the ECB will end up not raising rates this year."

"However, markets seem likely to price adverse scenarios for the time being as the hawkish talk continues to keep inflation expectations in check."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)