ECB's Nagel Refuses to Rule Out July Hike as Middle East Shock Persists

Bundesbank President Joachim Nagel said the ECB could hike rates again in July, keeping the door open after Thursday's quarter-point increase.

"The war in the Middle East is proving to be a strong and persistent supply shock," Nagel said Friday. He argued inflation is no longer confined to energy markets. Higher energy costs are feeding into services and goods prices.

That means the ECB cannot "look through" the shock, Nagel added. The Governing Council stands ready to act again if needed, he said.

Thursday's 25-basis-point move was driven by the spreading of price pressures beyond energy. One day later, Nagel refused to take a July hike off the table.

Sources familiar with the discussions told the press that a July move is not the base case. Still, Nagel's comments make clear that further tightening is a live option if oil prices climb again or inflation prints another upside surprise.

For forex traders, the message is a hawkish tilt at the margin. The probability of a July hike, while low, is now higher than it was a week ago, several traders said. That could keep the EUR/USD supported in the near term, though much depends on how the data evolves through June.

The ECB's next policy decision is set for July 27. Before then, the council will have one more set of inflation and growth projections – the June staff forecasts – to weigh against the oil price path.