By Elwin de Groot, head of macro strategy at Rabobank
Some headlines write themselves. Tokyo has already delivered one – and likely acted on it. Tehran may be waiting for its turn. The bond market, meanwhile, could have issued another warning to the Fed. As for the long-held consensus that 2026 would bring smooth disinflation, gentle policy easing, and AI-driven multiple expansion, that narrative has been under strain for some time. Yesterday’s European inflation – and to a lesser extent growth – data did little to support it. Both US and Eurozone Q1 GDP undershot expectations even as inflation pressures persist. To be sure, central banks held their fire, but no one can say they haven’t been warned.
Start with the yen, because that's where yesterday's most audible bang came from. After Finance Minister Katayama and top FX diplomat Mimura took turns at the microphone delivering what Mimura himself called Japan's "final evacuation warning" to markets, USD/JPY collapsed from above 160 to under 156 – the largest one-day move in the dollar against the yen since December 2022.
The MOF, predictably, won't confirm. But when a currency moves three big figures in a few hours with no other catalyst, traders who've sat through previous interventions tend to recognize the fingerprints. While writing this Daily, the USD/JPY pair is coming down sharply again.
The bigger issue, however, is whether intervention can do more than briefly stabilize markets. Japan faces structural pressures: it is a major energy importer amid elevated oil prices, and its central bank is cautiously pursuing policy normalisation after years of ultra-loose settings. Recent spikes in government bond yields – touching multi-decade highs – highlight the risks. Authorities can resist market forces for a time, but they cannot fundamentally change them.
Speaking of which: oil. Brent traded above $125 yesterday in early European trading on yet more reporting that Washington is preparing for an extended blockade of Iran's ports and may be considering renewed military action, before being abruptly knocked lower in heavy volume – possibly, some sources suggested, by official Japanese selling alongside the yen operation. So have we arrived at the point where finance ministries are actively managing crude on the side?
In any case, oil appears to be holding on to its decline despite rising geopolitical tensions. The UAE has urged its citizens in Iran, Lebanon, and Iraq to leave “immediately,” citing deteriorating regional conditions. At the same time, sources suggest the US is completing final pre-strike preparations, including intelligence gathering on Iranian oil infrastructure. In response, Iran is reportedly planning a “dual response”: missile strikes on Gulf energy assets and US-linked bases, alongside a potential closure of the Strait of Hormuz using mines and missiles. Senior US military officials have briefed President Trump on updated options for possible action against Iran. In short, multiple warnings have been issued, and the situation remains highly fluid – meaning the landscape could shift markedly over the coming days. Warnings are out.
In the Eurozone, April’s flash HICP rose to 3.0% y/y – the highest since September 2023 – driven largely by a 10.9% surge in energy prices, with inflation accelerating across Germany, France, Spain, and Italy. While the headline print was slightly below our forecast, this mainly reflected easing in core inflation, particularly services, which slowed from 3.2% to 3.0% y/y. This distinction is important. The headline signals renewed pressure, but core dynamics suggest inflation has not yet broadened into a wage‑price spiral that would warrant aggressive monetary tightening beyond limited “warning shots.” We expect Eurozone inflation to average around 3.1% in 2026, easing to 2.5% in 2027. While still above pre-war expectations – by roughly 1.7 percentage points cumulatively – this profile does not justify tightening policy into a slowing growth backdrop.
Indeed, Eurozone GDP data sharpened the inflation–growth trade-off. Q1 growth came in at just 0.1% q/q, below the 0.2%–0.3% consensus. France stagnated, Italy slowed, Germany surprised modestly to the upside at 0.3%, and Spain remained the standout at 0.6%. Importantly, most of the quarter predates the peak of the Iran-related energy shock, meaning the weakness reflects an economy already losing momentum rather than the direct impact of recent geopolitical developments (see our more in-depth take here). This suggests Q2 is likely to be similarly weak – or weaker in underlying terms – and implies that the ECB’s prior growth projections were already too optimistic before the latest shock. Our forecasts see Eurozone growth slowing from 1.5% in 2025 to 0.6% this year, followed by a modest recovery to 0.9% in 2027.
Against this backdrop, the ECB left rates unchanged at 2%, as widely expected. The decision itself was uneventful; the message was not. The Governing Council acknowledged that “upside risks to inflation and downside risks to growth have intensified,” with President Lagarde describing the outcome as “an informed decision on the basis of yet-insufficient information.” That phrasing suggests the decision was finely balanced, with some policymakers inclined to move – a message that also came through via ‘sources’ shortly after the press conference had ended.
Our ECB watcher Bas van Geffen characterises this as a “June or never” moment – and the uncertainty embedded in that phrase is key. Hawks still have a window to push for tightening, but it is narrowing. Earlier in the month, markets had priced in multiple hikes, driven by inflation concerns, yet that urgency has since faded. Financial conditions have remained orderly: spreads are contained, equities resilient, and no disorderly market reaction has emerged to compel ECB action. In that environment, the burden of proof shifts to those advocating a hike.
Our base case remains a 25bp increase in June, taking the deposit rate to 2.25%. June offers fresh staff projections and another month of data, making it the natural decision point. However, if the ECB does not act then, the case for tightening weakens materially. By July, energy pass-through should be near its peak, and evidence of second-round effects – if present – should be clearer. Absent such evidence, the argument for higher rates loses traction. A key condition for a June pause, however, would be a meaningful easing in energy prices, implying improvement in Middle East tensions – something not evident at present. The ECB, for its part, cannot be accused of failing to signal these risks.
Across the Channel, the Bank of England struck an “Alert but careful” tone, also holding rates steady. Governor Bailey described the stance as an “active hold,” balancing persistent inflation risks against growing concerns over employment and activity. While the BoE reiterated that it stands “ready to act as necessary,” both the minutes and Bailey’s remarks suggested reluctance to move prematurely. An overload of scenarios and caveats provided limited forward guidance. That said, we expect more Monetary Policy Committee members to lean toward tightening in June. Ultimately, how far that shift goes will depend heavily on developments around the Strait of Hormuz and the extent to which higher energy costs feed through into broader inflation.