ECB set to hike rates as oil tops $100, rattling markets

Currency and equity markets traded cautiously on Thursday as investors weighed oil prices holding above $100 a barrel, rising global bond yields, and a widely anticipated interest rate increase from the European Central Bank later in the day.

Brent crude futures remained above $100 after breaching the level on Wednesday for the first time since July, as escalating attacks on shipping between Iran and the United States threatened further disruption to energy supplies from the Middle East. The fresh energy shock sent global bond yields higher, with the benchmark U.S. 10-year Treasury yield edging up to 4.85%, its highest since 2023.reuters+1

Markets Under Pressure

The dollar index hovered near 98.81, inching away from a three-week low, while the euro and sterling were slightly weaker ahead of the ECB's rate decision. The yen paused its recent rally to seven-month highs, trading near 153.70 per dollar ahead of an expected Bank of Japan rate hike on September 18.reuters

In equities, MSCI's broadest index of Asia-Pacific shares fell 0.5%. Japan's Nikkei 225 finished 0.2% higher, while South Korea's Kospi declined 0.25%. In Australia, the ASX 200 shed roughly $32 billion in its biggest single-day drop since early June, closing down 1% at 8,819 points, according to ABC News.profit.pakistantoday+2

Central Bank Decisions and Inflation Data

The ECB is expected to raise its deposit rate by 25 basis points to 2.50% on Thursday, its second hike this year after a June increase. Attention will then turn to President Christine Lagarde's guidance on whether further increases could follow, with traders pricing ECB rates reaching 2.74% by December.newsquawk+2

Market focus later shifts to U.S. producer price data on Thursday and consumer price inflation on Friday — the last key releases before the Federal Reserve's September 15-16 meeting. Traders are pricing a roughly 60% chance of a Fed rate hike this month after last Friday's stronger-than-expected jobs report.reuters

"While higher inflation may warrant tighter policy, additional rate hikes would also increase government borrowing costs at a time when fiscal deficits and debt servicing burdens are already under scrutiny," said Lloyd Chan, senior currency analyst at MUFG.reuters

Bond Market Strain

The global bond sell-off pushed borrowing costs in several major economies to multi-year highs. Germany's 10-year yield touched its highest since April 2011, while UK 10-year and 20-year yields remained near post-2007 and 1998 highs respectively. Nick Twidale, chief market strategist at ATFX Global, said Brent's move through $100 would be viewed by many traders as a notable development, and that investors who had held back in anticipation of a Middle East peace agreement could reconsider their positions.profit.pakistantoday