European Central Bank: Oil-driven risks to policy path – Societe Generale

Societe Generale strategists note that Oil and Natural Gas prices have surged since the June European Central Bank (ECB) meeting, reversing optimism that followed the US–Iran Memorandum of Understanding (MoU). They expect policy to stay on hold today but see a real risk of further tightening if Gulf tensions persist. Market pricing now discounts two additional rate hikes by early 2027 as energy shocks threaten second-round effects.

Energy spike reshapes ECB outlook

"The MoU between the US and Iran had, wrongly now it transpires, fanned optimism for a durable decline in oil prices to pre-war levels and doused speculation of additional ECB tightening in 2H. If one week is a long time in politics, it is an eternity in geo-politics or geo-economics."

"The backdrop to today’s ECB meeting is quite straightforward: oil prices have spiked over $20 in the aftermath of the June council meeting and trade roughly where they were when the depo rate was raised by 25bp. Nat gas is up a whopping 25% compared to 11 June when the ECB took out insurance."

"Second round effects to non-energy goods and wages have so far not materialised but money markets have gone back to discounting two additional rate increases by 1Q-27."

"Policy will stay on hold today but we wouldn’t frankly be surprised if discussions took place over a second rate increase. Without de-escalation in the Gulf, a hike in the depo rate to 2.50% could be inevitable in September to lean against the second-round effects of the energy supply shock."

"For EUR/USD, positioning is short into the GC [Governing Council] meeting for the first time since early 2025. Hawkish policy deliberations are outweighed by the growth sapping effect of higher energy prices and hit to Europe’s terms of trade. A return over 1.1480/1.1510 is still a big ask."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)