ECB September rate hike all but guaranteed as Gas prices and inflation climb

The euro surged above 1.17 against the dollar for the first time in three months in late August, following the Treasury's surprise announcement of expanded buyback operations, though EUR/USD has since settled back around our 1.16 year-end target. While we remain constructive on the euro's medium-term outlook, an aggressive push higher looks difficult in the near term as long as European natural gas prices keep climbing. Dutch TTF gas futures rose to a more-than-three-and-a-half-year high above ¬71/MWh on Tuesday amid persistent US-Iran tensions - a dynamic that, while supportive of tighter ECB policy, poses a serious growth risk through rising consumer prices and a deteriorating terms of trade.

Both the continued climb in gas prices and the increase in headline inflation - which jumped to 3.3% in August - all but dot the iˇs and cross the tˇs for a September rate hike from the ECB. Yet we note that a pass through from the energy spike to underlying inflation was still conspicuously absent in yesterday's data, with the core figure stuck at 2.4% - just above target, and exactly where it was when the war began in February. While a September hike looks all but guaranteed, further tightening into restrictive territory beyond that is far from certain, and that could keep a lid on the euro, particularly given how aggressively markets are currently pricing in additional hikes.