Euro Inflation Data Supports ECB Rate Hike Base Case in September

TD Securities strategists are sticking to their base case of a 25 basis point European Central Bank (ECB) rate hike in September. The ECB's decision will be influenced by inflation data, which showed that Euro area Harmonised Index of Consumer Prices (HICP) rose to 2.9% year-over-year (y/y) in July.

Core inflation was at 2.5%, while services inflation reached 3.3%. The strategists note that there is limited evidence of meaningful second-round effects, suggesting that the rise in prices has not yet led to higher wage demands or other inflationary pressures.

The ECB's rate hike remains the base case, but a clear and durable resolution to the Middle East conflict would be required for this outlook to change. This suggests that markets are pricing in a cautious approach from the ECB, rather than a more aggressive stance.