|

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.

Author

Matthew Ryan, CFA

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

More from Matthew Ryan, CFA
Share:

Editor's Picks

GBP/USD declines to near 1.3500 as US-Iran tensions rise

The GBP/USD pair declines to near 1.3500 during the early European trading hours on Wednesday. Ongoing tensions in the Middle East provide some support to a safe-haven currency such as the US Dollar against the British Pound. All eyes will be on the US August jobs report later on Friday.

EUR/USD falls to two-week low below 1.1600 on broad USD strength

EUR/USD remains under bearish pressure after closing in negative territory on Tuesday and trades at its lowest level in two weeks below 1.1600 on Wednesday. As tensions in the Middle East escalate further, the US Dollar gathers strength on risk-aversion and hawkish Fed repricing, forcing the pair to stay on the back foot. Later in the day, private sector employment data from the US will be watched closely by market participants.

Gold recovers above $4,300; upside seems capped as Fed bets support USD

Gold recovers early lost ground to a four-week low, and trades above $4,320 heading into the European session. A modest US Dollar pullback is seen as a key factor supporting the commodity, though any meaningful upside seems elusive amid hawkish US Federal Reserve expectations. The escalating Middle East conflict lifted crude oil prices to a fresh high since July 24, stoking inflation fears and reaffirming bets for a Fed rate hike in September.

WTI advances to mid-$90.00s, fresh high since July 24 amid escalating US-Iran tensions

West Texas Intermediate (WTI) – the benchmark US Crude Oil price – scales higher for the third straight day – also marking the fifth day of a positive move in the previous six – and climbs to a fresh high since July 24 during the Asian session on Wednesday.

ADP Employment Report is expected to show a moderate increase in private payrolls in August

The Automatic Data Processing Research Institute will release its monthly report on private-sector job creation for August next Wednesday. The ADP Employment Change report is expected to show that the United States private sector added 47K new positions this month, little changed from the 44K new jobs reported in July.

Diesel’s record $100 warning: The oil shock hiding in plain sight

The Oil market may look calmer than it did a few months ago, but diesel is sending a very different message. The US diesel crack spread, the premium of ultra-low sulphur diesel futures over WTI, recently surged above $100 per barrel for the first time, reaching an intraday record of just over $102.00.