Euro Benefits from ECB's Proactive Inflation Response

Recently, several central banks have raised interest rates in response to the inflation shock caused by the Iran conflict. According to Michael Pfister at Commerzbank, markets tend to reward proactive central banks that quickly address shocks rather than downplaying them as transitory. This development has a positive impact on the euro, which has been disappointed by the European Central Bank's (ECB) historically cautious approach.

The ECB is now seen as more forceful in its response to inflation risks, which has improved the euro's standing. Several central banks have already raised rates since the conflict began, including the Reserve Bank of Australia and the Bank of Japan. While the Federal Reserve and the Reserve Bank of Australia had already been expecting rate hikes before the conflict, the ECB's more proactive stance is a welcome change for the euro.

Pfister emphasizes that central banks that react quickly to inflation shocks will be rewarded by the market in the long run. This means that if another shock occurs, market participants would expect these central banks to respond even more forcefully.