ECB Governing Council member Gabriel Makhlouf said the lack of a clear timeline for an end to the Middle East conflict raises concern about energy prices staying higher for longer, according to Reuters. He said inflation expectations should be watched closely for any signs of becoming unanchored.
Makhlouf said he will monitor indirect effects such as cost-push pressures in production, transport, and services. He added that possible second-round effects through wages may take longer to appear due to staggered wage-setting.
In markets, EUR/USD remained steady in the American session and traded above 1.1750 in positive territory.
We saw how concerns from late 2025 about a “higher-for-longer” energy price scenario were well-founded. The ongoing conflict in the Middle East did indeed push Brent crude prices above $105 in the first quarter of this year. Those elevated prices, now stable around $98, are directly feeding into the inflation figures we see today.
As a result, we must now closely monitor inflation expectations for any signs of de-anchoring from the 2% target. The latest Eurozone HICP flash estimate for April 2026 showed inflation stubbornly at 3.1%, reversing the downward trend we witnessed throughout last year. This has forced markets to re-price European Central Bank rate cut expectations, pushing them further out.
We are paying close attention to these indirect effects, particularly cost-push inflation in production and transportation. For derivative traders, this suggests that options pricing in ECB rate cuts before the fourth quarter of 2026 may be overvalued. Positioning through interest rate swaps to hedge against a hawkish ECB hold in June seems prudent.
Potential second-round effects via wages are now showing up, confirming earlier concerns. The recently released Eurozone negotiated wage growth for Q1 2026 came in hot at 4.7%, a clear signal of building domestic price pressures. This data supports the view that underlying inflation may remain sticky for several more quarters.
This environment explains why EUR/USD has held its ground, now trading firmly above 1.1800 as of May 1, 2026. The divergence in policy—with a newly cautious ECB versus a Federal Reserve still signalling potential cuts—creates a bullish case for the euro. Traders could consider using call options on EUR/USD to gain exposure to further upside, targeting the 1.2000 level last seen in 2024.
