German state CPI data lifts ECB rate hike odds to 97%

Preliminary inflation data from German states came in higher than previous readings on Monday, reinforcing expectations that the European Central Bank will raise interest rates at its September meeting. The euro edged higher against the US dollar on the back of the figures, with EUR/USD trading near 1.1600 during the European session.

State-Level Data Points to Persistent Price Pressures

Bavaria's consumer price index rose to 2.9% year-on-year in August, up from 2.8% in July, according to the Bavarian State Office for Statistics. Inflation data from six German states released Monday morning all came in above their prior readings, ahead of the national preliminary CPI figure, which was reported at 2.3% by the Federal Statistical Office. The broader Eurozone flash CPI estimate, due Tuesday, is expected at 3.3% year-on-year, up from 2.5% previously.fxstreet+2

The readings follow upside inflation surprises from France and Spain earlier in the week. BNY Mellon strategists noted that "the odds are stacked against the doves as the week ahead sees key inflation releases in Germany and the broader Eurozone," adding that the French and Spanish data "provided validation for the hawks". OIS markets now indicate a 97% probability of a rate hike at the ECB's September meeting, according to BNY Mellon. Analysts from Wells Fargo view 2.50% as the likely terminal rate, with the base case remaining a 25 basis point hike from the current level.investinglive+1

Fed Repricing Complicates the Currency Picture

The euro's gains on Monday were tempered by a stronger US dollar following Federal Reserve Chair Kevin Warsh's hawkish remarks at the Jackson Hole Symposium on Friday. Warsh warned that the Fed still has "work to do" if policymakers cannot be confident that underlying inflation is returning toward the 2% target. Rabobank analysts said his remarks "seemed designed to lift rate-hike expectations, rebalance the September debate towards the hawks and rebuild his inflation-fighting credibility".mitrade+1

The CME FedWatch tool showed odds of a September hold falling to 39.4%, down from nearly 60% a week earlier. Commerzbank strategists described "the hawkish repricing of Fed expectations" as "the main theme on Friday".fxstreet+1

Week Ahead: Data to Test Both Central Banks

Markets now face a packed calendar that could sharpen the policy outlook on both sides of the Atlantic. The Eurozone-wide flash CPI lands Tuesday, followed by the US employment report on Friday, where consensus expects nonfarm payrolls to rebound to 58,000 after July's decline. Rabobank cautioned that the upcoming data "could prove crucial for the FOMC's swing voters as they weigh the case for additional tightening". Meanwhile, the Bank of Canada is expected to hold rates steady on Wednesday amid strong growth and near-target inflation, while the RBNZ is seen delivering a 25 basis point hike.investinglive+1