Hawkish ECB Triggers Rate Hike Expectations Amid Global Geopolitical Tensions

Traders are bracing for an increasingly hawkish European Central Bank (ECB), expecting it to raise interest rates in September. The ECB's key deposit rate is expected to reach almost 3% by late 2027, up from its current level of 2.5%. According to money markets, there is a 25% chance that the deposit rate will hit 3% by March 2027 and a 60% chance by September.

The ECB's decision to raise rates in June was in response to the U.S.-Iran war-induced energy shock, which drove oil prices above $90 a barrel. Analysts say that traders are not just worried about elevated prices but also the risk of tighter supplies of refined fuels and thin euro zone gas inventories.

Mark Dowding, chief investment officer at BlueBay Fixed Income, warned that the war could weigh on the energy market long-term, fuelling inflation. He noted that the crack spread, which measures the margin between refined products and crude oil, is a key indicator of oil-related inflation pressures.