Iran war raises September ECB hike odds, Euro slips on 'buy the rumour, sell the fact'

While the ECB held rates steady on Thursday, it now looks more likely than not to hike again at its next meeting in September.

On the surface, nothing in the data is screaming for tighter policy. Underlying inflation remains contained just above target and there are, as yet, no clear signs of second-round effects from the spike in energy prices. Growth also remains weak, and officials will be wary of hiking the Euro Area economy into a slowdown or, heaven forbid, a recession.

However, the latest Iran war flare-up and jump in energy prices appears likely to force the ECB's hand. President Lagarde made clear yesterday that the ECB is watching developments in the Middle East closely, and with good reason: a sustained rise in oil prices threatens to unwind much of the progress made on inflation.

Should the conflict drag on without a path toward de-escalation, the ECB may find itself with little choice but to act preemptively in order to safeguard its inflation-fighting credibility

The euro dropped following the announcement, in what appears to be a classic case of "buy the rumour, sell the fact.

Swaps markets were already largely pricing in a hike at the September meeting, so with the bar for a hawkish surprise high, the absence of a strong commitment to a rate increase at the next meeting was always likely to be met with some downside for the common currency.