Oil prices approaching $90 reignites concerns about inflation, and expectations of interest rate hikes by the Bank of England and the European Central Bank resurface.

Notice that traders are increasing their bets on the Bank of England and the European Central Bank accelerating their interest rate hikes, following the rekindling of inflation concerns due to soaring oil prices. Over the past month, traders have fully digested the expectation of a 25 basis point rate hike by the Bank of England before September, with another hike expected before the end of the year. They also anticipate the European Central Bank to raise rates by 25 basis points in September, with another hike before the end of the year almost certain. This shift comes as escalating tensions between the US and Iran are pushing Brent crude oil prices closer to $90 per barrel. At the beginning of this month, the expectations for rate hikes by the Bank of England and the European Central Bank in the swaps market until next year were less than 25 basis points. However, President Trump's decision to impose a blockade on Iranian ships passing through the Strait of Hormuz, and demanding payment for all other goods, has disrupted the market's calm. Earlier on Monday, Trump claimed to take control of the Strait of Hormuz, stating on social media, "From now on, the United States will be considered the 'guardian of the Strait of Hormuz'; as a guardian, on the principle of 'fairness,' the United States will charge a 20% fee for all transported goods, to compensate for the necessary expenses to maintain security and stability in this turbulent region." Currency markets are pushing up bets on faster rate hikes Padraig Gavin, a strategist at the Dutch International Group, said in a report to clients, "This pricing to some extent reflects the balance of risks. If oil prices stay at current levels, the threshold for another hike remains high; but if oil prices continue to rise, the likelihood of a hike will tend more towards being a baseline outcome." The region's dependence on energy imports exposes it to the high risks of soaring energy prices. Despite signs of a turning point in inflation in the UK and the Eurozone, the recent surge in oil prices has reignited concerns about the need for policymakers to tighten monetary policy. Traders will closely watch the speech by Bank of England Governor Andrew Bailey scheduled for later on Tuesday to understand his views on price growth. He recently expressed frustration, stating that if a US-Iran war had not broken out, inflation would have already reached the central bank's target of 2%. The Federal Reserve is also expected to raise rates in September, with the probability of taking action this month approaching 50% according to currency markets. Fed Governor Christopher Waller said on Monday that if potential inflation continues to show broad-based price pressure signals, policymakers may need to further tighten policy. The later released US inflation data is expected to show a 0.2% month-on-month increase in core data for June. Investors will then turn to Fed Chairman Kevin Wash's testimony to look for signs of whether he approves of the implied interest rate path in the market.