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(Bloomberg) — Traders boosted wagers on Bank of England and European Central Bank interest-rate hikes after surging oil prices reignited inflation fears.
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For the first time in a month, traders are fully pricing a quarter-point BOE hike by September, followed by another before year-end, after escalating US-Iran tensions saw Brent crude prices jump above $86 a barrel. Money markets also expect the ECB to raise rates by 25 basis points in September with another hike by year-end all but certain.
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At the start of the month, swaps priced less than a quarter-point hike for the BOE and ECB through next year after oil prices fell toward $70 a barrel from a peak in April above $126. But US President Donald Trump’s reimposition of a blockade on Iranian ships transiting the Strait of Hormuz and payment demand for all other cargo upended the calm.
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The region’s reliance on energy imports leaves it highly exposed to soaring energy prices. While inflation in the UK and euro area had appeared to be turning a corner, renewed energy price pressures are likely to fuel concerns that policymakers will need to combat the threat of higher prices with tighter monetary policy.
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The Federal Reserve is also expected to raise rates in September, while money markets are assigning almost a 50% probability to a move as soon as this month. On Monday Governor Christopher Waller said policymakers may need to tighten policy further if underlying inflation continues to signal broad price pressures.
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US inflation data due later are expected to show the core figure rose 0.2% in June. Investors will then turn to Fed Chairman Kevin Warsh’s testimony for signs he endorses the market’s implied path for interest rates.
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