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Eurozone inflation rebounds, ECB may be forced to hike rates unless Iran peace deal

Euro area inflation rebounded in July, as the flare-up in the Iran conflict and the more than 20% monthly jump in crude oil prices brought the disinflation process to an abrupt halt. While the rise in headline inflation is largely attributable to energy costs and may prove temporary, the unexpected increase in core inflation - which strips out that volatility - warrants closer attention, as it points to stickier and broader underlying price pressure than perhaps anticipated.

While we are not yet seeing clear signs of second-round effects - inflation excluding energy remains just two tenths above the ECB’s target - the print should give the hawks on the Governing Council further ammunition to push for a rate hike in September.

At this stage, the only realistic path for the ECB to avoid further tightening would be a lasting US-Iran peace deal before the next meeting, and even that may not be enough. That window is clearly closing fast.

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.

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