Oil prices approaching $90 reignite concerns about inflation, and expectations of interest rate hikes by the Bank of England and Europe are making a comeback

The Zhitong Finance App noticed that after soaring oil prices reignited concerns about inflation, traders increased their bets on the Bank of England and the European Central Bank to accelerate interest rate hikes.

For the first time in a month, traders have fully absorbed the Bank of England's expectations of a 25 basis point rate hike before September, followed by another rate hike before the end of the year. They also expect the ECB to raise interest rates by 25 basis points in September, and another rate hike before the end of the year is almost a foregone conclusion.

This shift comes as the escalating tension between the US and Iran is driving the price of Brent crude closer to $90 per barrel. At the beginning of this month, expectations for the Bank of England and the ECB to raise interest rates until next year were less than 25 basis points in swap transactions. However, US President Trump re-imposed a blockade on Iranian ships passing through the Strait of Hormuz and demanded payment for all other goods, completely disrupting the calm in the market.

Earlier on Monday, Trump claimed to take over the Strait of Hormuz and wrote on social media: “From now on, the United States will be regarded as the 'guardian of the Strait of Hormuz. 'As a guardian, the US will charge 20% of all goods transported to cover all expenses necessary to maintain safety and security in this troubled region of the world.”

Money markets push up bets on faster rate hikes

Dutch International Group strategist Padraek Garvey said in a report to clients: “This pricing reflects the balance of risk to a certain extent. If oil prices remain at current levels, the threshold for another rate hike is still high; but if oil prices continue to rise, then interest rate hikes will tend to be a benchmark result.”

The region's dependence on energy imports makes it highly exposed to the risk of soaring energy prices. Although inflation in the UK and the Eurozone seems to have reached an inflection point before, the recent surge in oil prices has once again raised concerns that policymakers need to tighten monetary policy.

Traders will keep an eye on Bank of England Governor Andrew Bailey's speech scheduled to be delivered later on Tuesday to understand his views on price growth. He recently expressed his frustration, saying that had the US-Iran war not broken out, the current inflation rate would have reached the central bank's 2% target.

The Federal Reserve is also expected to raise interest rates in September, and the money market believes that the probability of acting as soon as this month is close to 50%. Federal Reserve Governor Christopher Waller said on Monday that if potential inflation continues to send broad signals of price pressure, policymakers may need to tighten policies further.

The US inflation data to be released later is expected to show a 0.2% month-on-month increase in the core data for June. Investors will then turn to the testimony of Federal Reserve Chairman Kevin Walsh to look for signs of whether he approves the market's implicit interest rate path.