In a nutshell, the ECB is more confidence about the convergence of inflation towards its target but is ready to wait a bit longer for more data before pulling the trigger. Lagarde was very vocal in signaling much more information will be available by the June meeting, implicitly confirming market expectations that June will be the start of the cutting cycle. As per the pace of cutting, the communication was quite clear. The ECB doesn’t have a predefined pattern for future steps and – quite importantly – Lagarde confirmed the ECB is independent and its policy decision will not be influenced by the Fed.

The market reaction was initially quite strong, with markets rallying up to 7-8bp across the curve. The large reaction partially corrected as it came on the heels of another strong rally over the past few days. We maintain our constructive view on European duration and spreads remain well supported in the context where policy is expected to gradually return to neutral but no major negative surprise on the economy is expected.