ECB Rate Hike Prospects Boost US Dollar Amid Energy Market Jitters

MUFG's Derek Halpenny believes that the European Central Bank (ECB) will likely raise interest rates in September, but warns that the euro may start to lose support against the US dollar as energy costs continue to rise.

The ECB's recent communication has reinforced the prospect of a rate hike, with some governors considering whether a hike was needed. While the statement acknowledged concerns over achieving price stability due to energy prices near baseline assumptions, it also noted that the 'full inflationary impact of the energy shock has yet to play out.'

Halpenny sees increased downside risks for the euro and pound if energy markets continue to rise, with natural gas prices already hitting peaks in March. He notes that momentum is pointing towards further gains for the US dollar, and a break below 1.1400 in EUR/USD adds to short-term bullishness.