ECB: Markets Bet on New Rate Hike in September

Financial markets are strengthening their expectations for a new monetary tightening by the European Central Bank (ECB) during its meeting on September 9 and 10. According to market reports this week, the institution could raise its deposit rate by 25 basis points to 2.50%, following an initial hike in June.

This outlook comes at a particularly sensitive time for the eurozone. The rise in energy prices, fueled by geopolitical tensions in the Middle East, continues to pose inflationary risks while European economic activity shows signs of resilience. For currency traders, this development could continue to favor the euro against the dollar and the British pound.

A New Rate Hike Becomes Increasingly Likely

The ECB raised its deposit rate to 2.25% in June, marking its first rate increase in nearly three years. In July, however, the Governing Council kept rates unchanged while indicating that it was closely monitoring the consequences of rising energy prices and their potential indirect effects on inflation.

Since then, the scenario of another hike in September has strengthened. Sources close to the matter cited by Reuters indicate that ECB officials are preparing to raise the deposit rate to 2.50%. The aim would be to limit the transmission of the energy shock to inflation, as the price increase in the eurozone remains close to 3%, significantly above the central bank's target of 2%.

Board member Isabel Schnabel also advocated for further hikes on Wednesday, arguing that the current level of rates alone would not sustainably bring inflation back to the ECB's target. She specifically warned against the risk of energy price pressures extending and spreading to other components of the economy.

The European Economy Offers More Room for the ECB

One of the factors supporting the scenario of a new monetary tightening lies in the resilience of economic activity.

The preliminary PMI indicators published in August showed an acceleration in private sector activity in the eurozone. The composite index rose from 52.0 in July to 52.1, reaching its highest level in nine months. In the manufacturing sector, the manufacturing PMI surged to 52.8, its highest level in over four years.

This improvement is notably driven by an increase in new orders and a recovery in employment in the manufacturing sector. It suggests that the eurozone economy still has some capacity to absorb the tightening of financial conditions.

However, the situation remains mixed. Activity in French services contracted in August, while Germany recorded modest growth in overall activity, supported by a significant improvement in its industry.

The Energy Shock Remains at the Heart of Concerns

The main difficulty for the ECB lies in the evolution of energy prices. The conflict involving Iran and geopolitical tensions in the Middle East have helped keep oil prices at elevated levels, with Brent recently surpassing $90 a barrel according to market data cited in recent days.

For the central bank, the issue is not limited to energy itself. A sustained increase in fuel and production costs can gradually be passed on to the prices of goods and services, and even to wages. This is precisely the 'second-round' risk that monetary officials are seeking to contain.

The ECB thus faces a balancing act: to act sufficiently to prevent a new acceleration of inflation without causing an excessive slowdown in European activity.

A Monetary Divergence Supporting the Euro

The prospect of a more restrictive ECB comes as investors closely monitor the direction of the Federal Reserve and the Bank of England.

In the United States, markets are particularly awaiting the next indications on the Fed's rate trajectory, as inflation remains above the 2% target. American data on PCE inflation and the anticipated speech at the Jackson Hole symposium are significant events for currency traders in this regard.

This difference in perception between monetary policies can alter the yield spreads between European and American bonds, and consequently, the relative attractiveness of the currencies.

The euro has already benefited from this dynamic. The EUR/USD pair recently approached $1.17, reaching its highest level in several months before slightly retreating. However, investors remain cautious ahead of upcoming American figures that could alter expectations regarding the Fed.

The British Pound Also Under Pressure

Against the pound, the euro also benefits from a shift in monetary expectations. Investors are now reassessing the trajectory of the Bank of England, amid a context where the British economy shows signs of resilience but where inflation and growth remain difficult to reconcile.

The August PMI data notably showed an improvement in activity in British services, with an index at 52.8, but cost pressures remain, particularly due to rising energy prices.

The divergence between London and Frankfurt could thus become an additional supporting factor for the euro in the foreign exchange market.

The September 10 Meeting Will Be Decisive

At this stage, the scenario of a 25 basis point hike in September appears to be largely priced in by the markets. But the real question will be what the ECB will do next.

Reports from Reuters suggest that officials at the institution would favor a hike in September while avoiding necessarily preparing the markets for a long series of increases. Long-term inflation expectations remain relatively anchored around the 2% target, which could limit the need to announce additional hikes immediately.

The decision on September 9 and 10 will depend in particular on the latest inflation data and the ECB's new economic projections. Until then, markets will continue to scrutinize energy prices, activity indicators, and signals from other major central banks.

For the euro, the stakes are considerable: if the ECB confirms its more restrictive turn while the Fed and the Bank of England adopt a relatively more cautious approach, the rate differential could continue to support the single currency. Conversely, a marked slowdown in European inflation or a deterioration in activity could quickly call this scenario into question.