Europe under a double blow

EUR/USD

Key zone: 1.1600 - 1.1650

Buy: 1.1680 (on a confident break above 1.1650) ; target 1.1850-1.2000; StopLoss 1.1620

Sell: 1.1550 (on strong negative fundamentals) ; target 1.1350; StopLoss 1.1620

European equities have fallen into a classic stagflation trap: oil is becoming more expensive because of the U.S.-Iran conflict, inflation is accelerating, and the ECB is being forced to tighten policy. The question for the market now is not whether the regulator will raise rates on September 10, but how long it will have to keep them high.

Europe enters the new week under pressure from two sides at once.

• Energy shock: Brent approached $97–98 as new U.S. and Iranian strikes on vessels in the Strait of Hormuz area intensified concerns about supply disruptions. Over the past week, Brent gained about 7.8%, while traffic of vessels carrying commodities through Hormuz fell to its lowest levels since May.
• Inflation has already returned above the ECB’s target, while the September 10 meeting virtually guarantees another rate hike.

It is precisely this combination that makes European equities vulnerable.

A reminder:

Europe’s problem is not only the rise in Brent itself: the European economy is much more dependent on external energy supplies, so a surge in oil and fuel prices translates more quickly into higher production, transportation, and logistics costs. Eurozone inflation accelerated to 3.3% in August from 2.9% in July. The energy component rose 14.3% y/y after 10.3% a month earlier. At the same time, services inflation declined to 3.0%, while underlying pressure remains noticeably weaker than the headline figure.

If Brent holds around $100 or moves higher, the temporary energy shock risks turning into a more prolonged increase in costs.

• For companies, this means lower margins.
• For bonds — higher yields.
• For equities — lower fair-value multiples.
• For the ECB — less room to ease policy.

So, What Does This Mean?

A 25 bp increase in the ECB deposit rate, from 2.25% to 2.50%, on September 10 is almost fully priced in. All 65 economists in the latest Reuters poll expected exactly this decision. Therefore, the main risk is the ECB’s signal after the hike.

If the regulator indicates that the energy shock requires additional tightening, the market will begin repricing not the September rate, but the terminal cost of money. This is precisely where the risk of another hike in December emerges.

Therefore, the main battle at the ECB meeting will not be over 2.50%, but over the trajectory after 2.50%.

European equities are being hit through the cost of capital: for the stock market, the chain becomes direct:

Brent ↑ → inflation expectations ↑ → Bund yields ↑ → ECB rate ↑ → cost of capital ↑ → equity multiples ↓.

The most vulnerable are companies highly sensitive to financing costs: real estate, construction, highly leveraged infrastructure projects, growth companies with long-duration cash flows, and highly valued technology stocks.

ECB raises rates → Fed also gets room to hike → Treasury and Bund yields remain high → global cost of capital rises.

If U.S. CPI this week confirms that inflationary pressure is persisting, the market will get another reason for Treasury yields to rise. This would be an additional negative factor for European equities.

A sustained move above $100 would sharply strengthen the inflationary scenario. A return below $90 would reduce pressure on the ECB and give European equities room to recover.

So, What Does This Mean?

After the September 4 NFP release, simply talking about “strong data ahead of CPI” is no longer enough — the market has indeed increased the probability of a September Fed rate hike.

Europe has found itself in a situation where good news for one market becomes bad news for another.

• Rising oil prices support energy companies but simultaneously hurt consumers and industry.
• An ECB rate hike helps fight inflation but increases the cost of capital.
• A strong U.S. labor market supports the U.S. economy but increases the probability of tighter Fed policy and keeps global yields elevated.

Therefore, the main threat is a scenario in which Brent remains around $100+, inflation does not return to target, and the ECB is forced to continue tightening after September.

So we act wisely and avoid unnecessary risks.

Profits to y’all!