Eurozone PMI beats forecasts, bolstering ECB September rate hike case

The European Central Bank appears on track to raise interest rates by 25 basis points at its September meeting after flash eurozone PMI data for August came in stronger than expected, reinforcing the case that the bloc's economy can absorb further monetary tightening even as energy-driven inflation accelerates.

Activity Holds Firm

The euro area composite flash Purchasing Managers' Index rose to 52.1 in August, beating forecasts and up from 52.0 in July, with manufacturing output climbing to 52.8 from 51.9 the prior month. Services activity held steady at 51.7. At the country level, performance diverged: Germany's composite reading edged down to 51.0 and France slipped to 48.8, while the periphery accelerated 1.4 points to 55.8.investing

Barclays ↘ 1.84% maintained its call for a September hike, noting that "with activity holding firm, inflation set to accelerate further and energy market developments showing little sign of relief, we continue to expect the ECB to raise rates by 25bp at its September meeting". The broker expects the ECB to pause after September but said risks remain tilted toward a more restrictive stance should energy prices fail to normalize.investing

Inflation Pressures Build

Final July headline inflation was confirmed at 2.9% year-on-year, up from 2.8% in June, driven primarily by a rebound in energy inflation to 10.3%. Barclays forecasts headline inflation rising to 3.4% in August and peaking at 3.6% in the fourth quarter before gradually converging toward the ECB's 2% target during 2027. Core inflation held steady at 2.5%, while negotiated wage growth slowed to 2.4% in the second quarter.investing

Rising oil prices tied to the Strait of Hormuz crisis and elevated bond yields have boosted expectations for a hawkish ECB stance. EUR/USD traded around 1.1670 during Asian hours on Tuesday, finding support from the rate hike expectations.fxstreet

Cipollone Downplays Stagflation Risk

ECB board member Piero Cipollone said in an interview published Monday that the risk of stagflation stemming from the Hormuz crisis is "rather remote," according to Reuters. "We will of course need to monitor changes in the macroeconomic environment, but for the time being there are no signs pointing to a scenario of stagflation," he said.kitco

Market participants are now looking to German IFO business sentiment data due Tuesday, US consumer confidence data, and Federal Reserve Chair Kevin Warsh's speech at Jackson Hole on Friday for further directional cues.fxstreet