Expectations of the ECB raising rates in September are intensifying, but subsequent moves may not be as aggressive
Tensions in the Iran-Iraq situation combined with rising natural gas prices have once again exposed Europe to energy pressures. The euro area’s August inflation rate rose to 3.3%, and market expectations for an ECB rate hike in September are growing stronger.
However, Matthew Ryan, Ebury’s head of market strategy, cautions that it’s not as straightforward as it seems.
Although energy prices have risen, there is currently no clear transmission to core inflation. Data show that the euro area’s core inflation rate actually fell from 2.5% in July to 2.4%, returning to the level before the escalation of the Iran conflict.
This suggests that an ECB rate hike in September may already be largely a given, but there is still considerable uncertainty about whether it will further tighten policy significantly afterward.
Markets have already priced in additional hikes in advance; if the ECB later issues more cautious signals, the upside potential for the euro could be limited.
In short, what the market is currently trading is “rate-hike expectations,” but what ultimately determines the euro’s next move is whether the ECB will dare to keep pressing the brakes.
Tensions in the Iran-Iraq situation combined with rising natural gas prices have once again exposed Europe to energy pressures. The euro area’s August inflation rate rose to 3.3%, and market expectations for an ECB rate hike in September are growing stronger.
However, Matthew Ryan, Ebury’s head of market strategy, cautions that it’s not as straightforward as it seems.
Although energy prices have risen, there is currently no clear transmission to core inflation. Data show that the euro area’s core inflation rate actually fell from 2.5% in July to 2.4%, returning to the level before the escalation of the Iran conflict.
This suggests that an ECB rate hike in September may already be largely a given, but there is still considerable uncertainty about whether it will further tighten policy significantly afterward.
Markets have already priced in additional hikes in advance; if the ECB later issues more cautious signals, the upside potential for the euro could be limited.
In short, what the market is currently trading is “rate-hike expectations,” but what ultimately determines the euro’s next move is whether the ECB will dare to keep pressing the brakes.
