Geoff Yu at BNY highlights that upcoming German CPI and Eurozone flash CPI releases are pivotal for European Central Bank (ECB) rate hike expectations, with markets currently pricing in a near-certain September hike. According to OIS markets, there is a 97% chance of a rate increase at the September ECB meeting, following upside inflation surprises in France and Spain that have validated hawkish sentiment among policymakers [1].
Despite the strong headline inflation readings, Yu notes that services inflation—a key indicator of wage pressures and domestic demand—is continuing to decline across Europe. He also points out that second-round wage effects remain unclear, with even hawkish ECB members and President Christine Lagarde acknowledging the lack of clear evidence for such effects at the July meeting [1].
The ECB is likely to push for additional preemptive action, but Yu suggests there is risk reward in fading the market's 'certainty' of a hike, especially at current levels. The ECB’s pre-decision quiet period is about to begin, making the upcoming inflation and PMI figures crucial for central bank signaling. A rise in Eurozone headline inflation, particularly in the flash CPI due Tuesday, would reinforce pressure on ECB rate expectations and validate the hawkish messaging from Executive Board Member Isabel Schnabel [1].
Final PMIs across the Eurozone and U.K. will also be closely watched to assess whether recent improvements in economic activity are sustained, with embedded price indices offering further insight into inflation pass-through risks [1].
CONCLUSION
Markets are heavily anticipating a September ECB rate hike, with inflation data from Germany and the Eurozone set to be decisive. While headline inflation remains elevated, declining services inflation and unclear wage effects suggest some uncertainty. The upcoming data releases will be critical for shaping ECB policy and market expectations.