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ECB's Lagarde Faces Hawkish Test as Euro Rallies on Rate Bets
The ECB meets this week with markets pricing a 90% chance of a September hike. EURUSD is rising on expectations of hawkish rhetoric from Lagarde, even as oil and yields push higher.
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The ECB meets this week with markets pricing a 90% chance of a September rate increase. The probability of two hikes by the end of 2026 stands at 60%, futures market data show. The Federal Reserve faces a similar path, with a 77% chance of a September hike and a 56% probability of two increases by 2026.
The rally in Brent crude, driven by Houthi attacks on Red Sea tankers and supply disruptions in Russia and Kazakhstan, has pushed up inflation expectations. Traffic through the Strait of Hormuz dropped to nine vessels, while Strait of Bab al-Mandeb traffic fell from 44 to 29 vessels, according to Kpler. The dollar has retreated from recent highs, giving EURUSD room to advance despite the rise in Treasury yields.
Eurozone consumer prices rose from 1.9% in February to 3.2% in May, prompting the ECB to raise its deposit rate to 2.25% at its previous meeting. June CPI slowed to 2.8%, giving the central bank room to pause at the July meeting. Yannis Stournaras, a member of the Governing Council, said the resurgence of conflict in the Middle East has brought the ECB back to the forefront in the fight against inflation.