Hot US Inflation Lifts Hike Bets as Oil Surges (14 – 18 September)

The week began with markets focused on Wednesday’s Federal Reserve decision after hotter US inflation data strengthened expectations for another rate hike. August CPI remained at 3.4% year-on-year, but the monthly increase accelerated to 0.4%, its strongest in three months, while producer prices also picked up. Markets now assign roughly an 86% probability to a 25-basis-point Fed hike, supporting the dollar and pushing Treasury yields higher.

Energy markets added another layer of inflation risk after drone attacks prompted Saudi Arabia to suspend its East-West pipeline, a major alternative route to the Strait of Hormuz with a capacity of around 7 million barrels per day. Brent surged toward $108 as talks over a temporary Hormuz shipping corridor were postponed. Meanwhile, the ECB delivered an expected 25-basis-point hike, while stronger producer inflation in Japan reinforced expectations for further BOJ tightening.

Market Drivers & Catalysts

• Fed Hike Expectations Surge: Markets price in roughly an 86% probability of a 25-basis-point increase on Wednesday after hotter monthly CPI and accelerating producer inflation.
• Saudi Pipeline Shutdown: Saudi Arabia suspended its 7-million-barrel-per-day East-West pipeline following drone attacks, helping Brent climb toward four-month highs.
• ECB Raises Rates: The ECB increased rates by 25 basis points, taking the deposit rate to 2.50%, the main refinancing rate to 2.65%, and the marginal lending rate to 2.90%.
• Hormuz Talks Delayed: Negotiations between Iran and Gulf states over a temporary shipping corridor through the Strait of Hormuz were postponed.
• BOJ Tightening Expectations: Japanese producer inflation accelerated to 7.6%, strengthening expectations that the BOJ could raise rates this month.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield climbed to around 4.97%, near multi-year highs, as hotter inflation strengthened expectations for a Fed rate increase. August CPI remained at 3.4% annually and rose 0.4% monthly, while producer prices accelerated. Markets now price roughly an 86% probability of a 25-basis-point hike on Wednesday. Rising oil prices added further inflation pressure.
• UK 10-Year Bond Yield: The UK 10-year gilt yield remained near recent multi-decade highs as persistent inflation concerns, fiscal risks, and higher global yields kept pressure on the bond market. Rising oil prices added to the UK’s inflation outlook, while markets continued to price in further Bank of England tightening.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield approached 2.99% as expectations for further BOJ tightening strengthened. Producer inflation accelerated to 7.6% in August, while rising oil prices increased concerns over imported inflation. Higher global yields added upward pressure.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield rose toward 3.50% following the ECB’s 25-basis-point rate increase. The deposit rate reached 2.50% and the main refinancing rate 2.65%, while President Christine Lagarde maintained a hawkish tone. Higher oil prices and rising global yields also supported the move.

Commodities

Gold remained under pressure around $4,300–$4,334 per ounce after declining for three consecutive weeks. Higher oil prices and expectations for tighter Fed policy weighed on the metal as markets priced an 86% probability of a 25-basis-point increase. First resistance is seen at $4,350, with initial support around $4,260.

Silver declined toward $64 per ounce, losing more than 3% over the week as a stronger dollar and higher rate expectations pressured the metal. Hotter US inflation and the roughly 86% probability of a September Fed hike increased pressure on rate-sensitive precious metals.

Currencies

• U.S. Dollar Index (DXY): The dollar remained firm ahead of Wednesday’s Fed decision as hotter US inflation strengthened expectations for another rate increase. August CPI remained at 3.4% year-on-year, while the monthly reading accelerated to 0.4%, its strongest increase in three months. Markets now assign around an 86% probability to a 25-basis-point hike.
• Euro: The euro slipped below $1.16 to around 1.1585, remaining within a roughly 100-pip range for a third consecutive week. The ECB raised rates by 25 basis points as expected, while Lagarde’s subsequent remarks maintained a hawkish tone. Resistance stands at 1.1640, while initial support is located around 1.1560.
• British Pound: Sterling traded around $1.3515, slipping as the dollar strengthened ahead of the Fed decision. UK yields remained close to multi-decade highs amid persistent inflation and fiscal concerns, while markets continued to expect further BoE tightening. Rising energy costs added to the inflation risks facing the UK.
• Japanese Yen: The yen weakened beyond 154 per dollar, retreating from nearly seven-month highs as stronger US producer inflation supported the dollar. Japanese producer prices rose 7.6% in August, strengthening expectations for a BOJ rate increase, while higher oil prices added to imported inflation risks. Resistance stands at 155.00, with support around 153.80.

Economic Data Highlights

• US Inflation: Annual CPI remained unchanged at 3.4% in August, in line with expectations. Monthly inflation accelerated to 0.4%, its strongest increase in three months, adding to expectations for a more hawkish Fed.
• ECB Monetary Policy: The ECB raised rates by 25 basis points, taking the main refinancing rate to 2.65%, the marginal lending facility to 2.90%, and the deposit rate to 2.50%. Lagarde maintained a hawkish tone following the decision.
• China Inflation: Annual consumer inflation accelerated to 0.8% from 0.5%, matching forecasts. Producer inflation increased to 3.8% from 3.5%, slightly above expectations of 3.7%, partly reflecting higher energy costs.
• Japan Producer Prices: Producer inflation accelerated to 7.6% in August, strengthening expectations that the Bank of Japan could raise rates this month as higher oil prices add to domestic inflation risks.

Macro Calendar Highlights

• Tuesday, September 15: US Retail Sales and Industrial Production.
• Wednesday, September 16: Federal Reserve Interest Rate Decision, FOMC Economic Projections, and Fed Press Conference.
• Thursday, September 17: Bank of England Interest Rate Decision, US Initial Jobless Claims, and Philadelphia Fed Manufacturing Index.
• Friday, September 18: Bank of Japan Interest Rate Decision and Japan National CPI.