AI investment offsets Iran war shock, September ECB hike a 'done deal'

Macroeconomic data out of the Eurozone last week bolstered market bets that the ECB will hike rates again at its September meeting.

The Euro Area economy grew at a significantly faster than expected pace in the second quarter of the year following a boost in AI investment and an increase in government spending.

This proved more than enough to offset downside from the Iran war and spike in energy prices, which so far appears to be having a surprisingly muted impact on activity in the common bloc.

Core inflation also surprised to the upside, indicating that the risk of second round effects from the energy price spike has not fully dissipated. Swap markets continue to price around a 90% chance of a 25 bp hike at the ECB’s September meeting, which is buoying the common currency back towards the top of the recent range.

We think that this is now effectively a done deal even in the event of a peace deal, as not only does the Euro Area economy appear resilient enough to withstand further tightening, but the bloc is more exposed to imported energy inflation than across the Atlantic.