FOMC Hawkishness Fuels September Rate Hike Fears Amid US-Iran War Escalation

The global financial markets were dominated by a hawkish FOMC meeting on Thursday. The Fed left interest rates unchanged, but three of the 12 Federal Open Market Committee members voted for an immediate hike. Jerome Powell did not clearly identify a trigger for the rate increase.

Warsh reinforced the tightening bias without specifying a clear catalyst. This move pushed up eurozone inflation expectations, particularly at the short end. As a result, markets now price a 90% probability of a September rate hike by the European Central Bank.

The US-Iran war escalation also contributed to higher energy prices, lifting eurozone inflation expectations. The Treasury curve steepened as short-end yields fell and long-end yields rose. This caused the USD to weaken against its peers, especially the euro.

Equities across the globe, including European markets, saw sharp declines. AI-related stocks were particularly hard hit. Energy stocks outperformed their counterparts in Europe, however.