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(Bloomberg) — Traders amped up bets on European Central Bank and Bank of England interest-rate hikes after soaring energy prices fueled fears inflation will surge.
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Swaps imply two full 25-basis-point hikes by the ECB this year compared with one on Friday. A first hike is fully priced by June. Meanwhile money markets see a 70% chance of a BOE hike by year-end compared to bets on rate cuts last week.
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“The ECB and BOE are effectively paralyzed: easing into an oil shock risks credibility, tightening risks growth,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc. “Our bias remains that EUR rates stay under pressure, with energy risk overwhelming any near‑term disinflation narrative.”
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What Bloomberg Strategists Say:
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“More bond losses in Europe are looming. The prognosis for gilts is worse than for bunds because of the inflation outlook in the two economies. Inflation and core inflation in the euro area was well anchored going into the war, but that wasn’t the case with the UK. So the ingredients are in place for UK inflation to bounce off its expected lows and set off another price spiral.”
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— Ven Ram, macro strategist. For the full analysis, click here
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German bonds slumped led by short-dated notes which are among the most sensitive to changes in monetary policy. The two-year yield jumped 15 basis points to 2.46%.
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Gas prices jumped as much as 30% on Monday, extending their biggest weekly advance since the energy crisis from earlier this decade. Oil prices rose above $100 a barrel earlier as more major Middle East producers curbed production and the Strait of Hormuz remained effectively closed.
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