ECB Faces Hawkish Shift Amid Geopolitical Tensions and Inflation Pressures

Markets are bracing for an increasingly hawkish European Central Bank (ECB) amid concerns over geopolitical tensions and inflation pressures. The ECB is expected to raise rates in September, following a tightening in June to combat price increases stemming from the US-Iran war-induced energy shock.

Oil prices are trading above $90 a barrel, while refined fuel supplies are seen as potentially tighter, contributing to higher costs for consumers. Analysts say the risk of ongoing conflict and rising inflation is keeping investors on edge, despite oil price retreats.

Rate hike bets have gained momentum, with markets pricing in a roughly 25% chance of the ECB's deposit rate reaching 3% by March 2027 and around 60% by September. This represents a significant increase from just last month, when no chance of reaching 3% by March was anticipated.

Analysts warn that the ongoing conflict could weigh on energy markets long-term, fuelling inflation further. Mark Dowding, chief investment officer at BlueBay Fixed Income, notes that crack spreads will remain elevated for the foreseeable future due to tighter refined product markets.