FX.co ★ Bund Yields Near 3% as ECB Rate Hike Looms

German 10-year Bund yields traded just above 3% as investors braced for a likely European Central Bank interest rate increase next week, while cautiously hoping for progress in Middle East peace efforts. Markets now see an almost certain 25-basis-point hike at the ECB’s June 11 meeting, with a total of two—and possibly three—rate increases expected over the course of the year. This shift in expectations follows a rise in euro-area inflation to 3.2% in May, its highest level in more than two and a half years. Core and services inflation also climbed, signaling that price pressures are broadening beyond energy.

Uncertainty nevertheless remains high as policymakers balance stubborn inflation against weak economic growth. Isabel Schnabel, one of the ECB’s most hawkish Governing Council members, cautioned on Monday that it is still too early to determine how many additional rate hikes will be needed. At the same time, US-Iran talks continued, and military clashes between Lebanon and Israel persisted despite a pending US-brokered ceasefire proposal.