Despite a slump in business and consumer surveys since the start of the Iran war, economic activity seems to have held up quite well. The risks to our forecast that growth stalls in Q2 are firmly on the upside. Moreover, the drop-back in oil prices over the past few weeks means that headline inflation will be lower than we had previously assumed and a lot lower than the ECB’s latest projections. As a result, we expect the ECB to leave interest rates unchanged in July and September, and think the next move to be a rate cut as inflation falls next year. Reflecting this, government bond yields are likely to decline and we forecast the euro to fall further against the dollar, while euro-zone equities will underperform as the AI rally remains the dominant driver of equity markets.
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