Euro Rebound Drives September Hike Bets as Oil Prices Soar

The Euro has strengthened against most major peers, not just due to Dollar weakness from fading Fed hike bets. In fact, the broader-based strength of the Euro is a reflection of investors repricing the European Central Bank's stance on interest rates.

The ECB's reaction function has shifted as oil prices rise above $100 after renewed attacks involving Iran, US forces, and Saudi energy infrastructure. This development pushes markets back toward the ECB's baseline scenario for energy costs and inflation.

The ECB has not become more hawkish due to rising oil prices alone. However, higher energy costs do matter because they lift the projected path for headline inflation, making it easier for policymakers to conclude another rate hike is warranted. The recent GDP data showed Eurozone GDP expanded 0.4% qoq in the second quarter, beating expectations and reinforcing this assessment.

As a result, markets now price roughly a 70% probability of a September ECB hike, with major banks such as Deutsche Bank, UOB, and ING all leaning toward a move to 2.50%. A decisive break above $1.1499 in EUR/USD would strengthen the case for this scenario.