Hot US inflation data raised bets for a full percentage point rate hike

In early European trade on Thursday, the dollar surged higher, and European stock markets edged down as the latest US inflation report raised the possibility of further monetary tightening, weighing on global economic growth.

EU cuts eurozone growth forecasts

On Thursday, the European Commission revised up its estimates for inflation and reduced its forecasts for eurozone economic growth this year and next, mainly because of the impact of the Ukraine war on energy prices in Europe.

EU executive now predicts 2.6% growth this year for the 19-country currency bloc, down from 2.7% in May.

Next year, however, the effect of the Ukrainian war and rising energy prices is expected to be even more acute, resulting in a growth of 1.4% rather than the 2.3% as thought earlier.

The report's point is that major European economies are expected to experience a remarkable slowdown next year.

ECB's dilemma

As a result, the European Central Bank faces a difficult situation. A weaker currency can contribute to pushing up inflation. Still, a rapid increase in interest rates would put even more pressure on an already overstretched economy.

Another hefty rate hike is on the table

Also, the Federal Reserve is under pressure to raise interest rates again after consumer inflation reached a record high of 9.1% in June, which may contribute to a more probable recession worldwide because the US is the world's largest economy. 

A full percentage point rate hike appeared to be expected after Fed Bank of Atlanta President Raphael Bostic commented that "everything is in play" to counter price pressures.

Furthermore, Loretta Mester, president of the Federal Reserve Bank of Cleveland, told Bloomberg that the central bank must set rates far higher than neutral to combat the soaring inflation rate.

This increased expectations that the Fed will raise rates by 100 basis points rather than 75 bps as expected this month. Given that, it shouldn't be a surprise if we see a continued surge in demand for the dollar dominating the currency market and putting more pressure on its peers.

Recession fears hit the oil market

We can already see how the prospect of significant rate hikes from the Fed and even the ECB is impacting the oil market as oil prices have fallen in the past two weeks due to recession concerns, despite lower Russian crude and refined product exports amid Western sanctions and disruptions in Libya. Added to the spot market, Brent crude futures for September were also down on Thursday, dropping below $100.

Brent broke the 200-day EMA on Thursday, falling below $96 per barrel, which sparked interest in $94 by sellers.