ECB's Sleijpen: Repeat of 2022 Inflation Less Likely, Euro Dips to 1.1599
5h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
ecbinflationeuro
Fazen Markets Editorial Desk
Collective editorial team · methodology
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European Central Bank board member and Dutch central bank governor Klass Knot delivered remarks on inflation risks on 17 June 2026. The euro declined 8 pips against the US dollar to 1.1599 during the European trading session. Knot stated that a repeat of the 2022 inflation surge appears less probable but cannot be fully excluded.
The Eurozone Harmonised Index of Consumer Prices peaked at 10.6% in October 2022, the highest level since the euro's creation. The current backdrop features a disinflation trend, with HICP at 2.4% in May 2026. Core inflation excluding energy and food has proven stickier, remaining above 2.5%. The primary catalyst for current ECB communication is navigating the final phase of policy normalization. Officials are balancing declining headline inflation against persistent services inflation and labor market tightness. The ECB's last policy move was a 25 basis point rate cut in June 2025, bringing the deposit facility rate to 3.0%.
Wage growth remains the critical uncertainty, with negotiated wages rising 4.7% year-over-year in Q1 2026. This pace exceeds the ECB's 2% inflation target, fueling concerns about entrenched price pressures. The trigger for Knot's commentary is likely the upcoming Q2 wage data and July policy meeting. Markets are scrutinizing every signal for clues on the pace of subsequent rate cuts.
Market-implied pricing from overnight index swaps shows traders expect 48 basis points of ECB easing through year-end 2026. This pricing has retreated from earlier expectations of 75 basis points in January. The Euro Stoxx 50 index trades at 4,850, a 2.1% gain year-to-date versus the S&P 500's 7.8% rise. German 10-year bund yields stand at 2.31%, 18 basis points below their 2024 peak of 2.49%. The euro has depreciated 3.2% against the US dollar over the past three months.
Critical inflation metrics show a mixed picture. Headline HICP fell from 2.6% in April to 2.4% in May 2026. Core HICP, however, held steady at 2.8%. The five-year, five-year forward inflation swap, a key market gauge of long-term inflation expectations, trades at 2.1%. This level is within the ECB's target band but above the 1.8% reading seen in late 2023. Brent crude oil futures trade at $78 per barrel, down 12% from their 2026 high of $89.
| Metric | May 2026 Level | Change from Peak |
|---|---|---|
| Headline HICP | 2.4% | -8.2 p.p. from Oct '22 |
| Core HICP | 2.8% | -2.1 p.p. from Mar '23 |
| EUR/USD | 1.1599 | -0.7% YTD |
| 5y5y Inflation Swap | 2.1% | +0.3 p.p. from Nov '23 |
Knot's focus on second-round effects signals a cautious ECB, directly impacting rate-sensitive sectors. European banks like ING Groep and BNP Paribas benefit from a higher-for-longer rate environment, supporting net interest margins. The STOXX Europe 600 Banks Index is up 5.3% this quarter. Conversely, high-duration growth stocks and real estate investment trusts face headwinds. The iShares European Property Yield UCITS ETF is down 1.8% month-to-date.
Persistent wage pressure suggests continued outperformance for companies with strong pricing power. Consumer staples giants Nestlé and L'Oréal have demonstrated this ability, with both stocks outperforming the broader Euro Stoxx 600 by over 300 basis points in 2026. A key counter-argument is that slowing economic growth will dampen wage demands and corporate pricing power faster than the ECB anticipates. Eurozone GDP grew just 0.3% quarter-over-quarter in Q1 2026.
Positioning data from the Commodity Futures Trading Commission shows asset managers have increased net long euro positions for three consecutive weeks. This flow suggests a belief that the ECB's policy path will be less dovish than the Federal Reserve's, providing relative currency support. However, hedge funds maintain a net short bias, reflecting skepticism about Europe's growth outlook.
The next major catalyst is the Eurozone May wage growth data release on 24 June 2026. A print above 4.5% would reinforce Knot's warning and could stall further rate cut expectations. The ECB's monetary policy meeting on 17 July is the next live date for a potential rate decision. Markets currently assign a 65% probability of a 25 basis point cut at that meeting.
Traders will monitor the EUR/USD 1.1550 support level, a technical zone tested multiple times in Q2 2026. A sustained break below could target 1.1450. For bund yields, the 2.25% level on the 10-year note is critical support. A break below could accelerate a rally, pressuring the euro further. The price of Brent crude oil remains a key variable; a sustained move above $82 per barrel would complicate the disinflation narrative.
Second-round effects occur when an initial price shock, like rising energy costs, leads to sustained higher inflation through wage-price spirals. Workers demand higher pay to compensate for lost purchasing power, and businesses then raise prices to cover increased labor costs. This creates a self-reinforcing cycle that makes inflation persistent and harder for central banks to control. The ECB's primary fear is that the 2022 energy shock permanently reset wage-setting behavior.
In 2023, the ECB was in a clear hiking cycle, raising rates at seven consecutive meetings to combat surging inflation. The current phase is one of cautious normalization, with the bank having paused since its June 2025 cut. Communication has shifted from emphasizing the need to hike forcefully to emphasizing data dependence and the risks of cutting too early. The balance of risks has tilted from purely inflationary to a dual mandate of price stability and growth.
A slower pace of ECB easing would maintain upward pressure on sovereign bond yields across the Eurozone. This dynamic would be most pronounced for periphery nations like Italy, where the spread between Italian and German 10-year yields could widen from its current 140 basis points. Higher funding costs pressure national budgets, particularly for highly indebted members. It also increases the attractiveness of European fixed income for yield-seeking global investors relative to US Treasuries.
The ECB's primary inflation fight has shifted from energy prices to persistent wage growth and service sector dynamics.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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