Central banks across Europe are maintaining a cautious stance in response to persistent geopolitical risks, particularly the ongoing conflict in the Middle East, and rising energy prices. The Magyar Nemzeti Bank (MNB) of Hungary has kept its base rate unchanged at 6.25%, with ING analysts expecting no rate cuts through 2026 due to Hungary's vulnerabilities and the elevated energy price environment. They forecast Hungarian inflation to average 3.5% in Q2, rise above the tolerance band in the second half of the year, and reach 4.3% in Q4, with a worst-case scenario potentially pushing inflation above 6% in Q3, which could force the MNB to raise rates further [1].
Similarly, the Bank of England (BoE) is expected to keep its Bank Rate at 3.75% in a unanimous decision, according to TD Securities. The BoE's Monetary Policy Committee (MPC) is adopting a wait-and-see approach, citing resilient UK GDP and labor data, but also acknowledging that CPI inflation will be higher in the near term due to energy prices. Projections indicate inflation will remain above target into 2026, with year 2 inflation now expected to be slightly above 2% and the risk of year 3 inflation rising above the February forecast of 2.0%. The MPC is likely to emphasize scenario analysis, considering the potential for more persistent inflation and weaker GDP growth if energy price pressures intensify [2].
For the European Central Bank (ECB), Rabobank has shifted its expected timing for a rate hike from April to June, citing muted market reactions and ongoing uncertainty from the Middle East conflict. Policymakers who favor a hike must now persuade their peers, and conviction for a near-term move remains low due to the 'fog of war.' Rabobank warns that prolonged conflict could have a stagflationary impact on the Eurozone [3].
Market data reflect these concerns. The EUR/USD currency pair remains range-bound, with BBH noting that the Eurozone's growth outlook is deteriorating as the energy shock weighs on confidence. The IFO business expectations index fell to a 32-month low of 83.3 in April, and the composite PMI implied a -0.1% quarterly GDP decline for Q2, alongside rising inflationary pressures. Markets are pricing in around 75 basis points of ECB tightening over the next 12 months, with EUR/USD expected to trade between 1.1600 and 1.1800 in the near term [4].
Despite weak Eurozone data and a risk-off market mood, the EUR/USD has rebounded above 1.1700, trimming losses ahead of the US session. The German IFO Business Climate index dropped to 84.4 in April, its lowest since October 2022, reflecting higher energy costs linked to the Middle East conflict. The ECB is widely expected to keep rates on hold at its upcoming meeting, but markets are looking for signals of a rate hike in the coming months. Technical analysis suggests key resistance at 1.1740, with support between 1.1645 and 1.1670 [5].
CONCLUSION
European central banks are maintaining a cautious, hawkish stance amid heightened geopolitical risks and rising inflation pressures, with no immediate rate cuts expected. Markets are pricing in further tightening, but central banks are emphasizing flexibility and scenario analysis as uncertainty persists. The EUR/USD remains range-bound, reflecting the balance of weak growth data and expectations for future policy action.