ECB Traders Anticipate Hawkish Stance Amid Geopolitical Tensions

Traders are bracing for an increasingly hawkish European Central Bank (ECB), betting that geopolitical tensions will keep inflation pressures stubborn despite elevated oil prices.

The ECB is expected to raise rates in September, and markets price a roughly 25% chance of the deposit rate reaching 3% by March 2027 and an about 60% chance by September. Just a month ago, they priced no chance of a move to 3% by March.

Economists say the prolonged Middle East conflict is behind the increasing hawkish bets, with the war potentially weighing on energy markets long-term and fueling inflation. Euro area inflation is also driven by natural gas market dynamics, with storage levels at the lowest for this time of year in over a decade amid expectations the region will fall short of its goal before winter.