European markets wrap: Quiet session ahead of US CPI data

Headlines:

Markets:

• WTI crude oil down -3.46% to $98.93
• Gold up +0.45% to $4335
• EUR/USD down -0.15% to 1.1592
• USD/JPY down -0.29% to 153.97
• S&P 500 up +0.50% to 7636.75
• Bitcoin up +0.32% to $76,770

With little in the way of data and news releases before the US CPI report, trading was subdued. The sole economic figure was the UK GDP, which came in at 0.4% month-on-month in July, beating the 0.0% forecast and representing the strongest annual growth rate since February 2025. The services sector—especially computer programming and R&D—drove the gains, though higher energy costs, elevated borrowing costs and geopolitical uncertainty continue to cloud the broader outlook.

On the geopolitical front, oil prices climbing above $100 have added to pressure for a diplomatic resolution to the Iran conflict, strengthening Tehran's position as disruptions in the Middle East tighten global energy supplies. The key event to watch is Monday’s GCC meeting, where Gulf states are expected to discuss the reopening of the strait with Iran.

The AFP also reported that the Houthis have completed their takeover of the Bab el-Mandeb Strait, gaining control over another critical chokepoint for global shipping and energy flows. With both routes essentially under Iranian control, the need for a swift diplomatic resolution has intensified.

Against this backdrop, oil prices fell more than 3% in the morning, and US equities erased most of yesterday’s losses. That could be down to daily noise, profit-taking, or expectations of a surprising breakthrough over the weekend.

During the American session, all attention will be on the US CPI report. The headline CPI year-on-year is expected at 3.4% versus 3.4% previously, while the month-on-month measure is seen at 0.4% compared with 0.1% prior. Core CPI year-on-year is expected at 2.4% versus 2.5% previously, with the month-on-month reading anticipated at 0.2% versus 0.2% prior.

The core month-on-month measure will be closely watched, as Fed members have been focusing on it. Fed's Waller recently noted that he would consider a rate hike in September if the monthly core reading surprises to the upside. Unfortunately, that was before the latest surge in oil prices, with WTI crude now trading above the $100 level.

The break of that psychological level triggered a hawkish repricing across the board, with traders now pricing in a 67% chance of a rate hike at the upcoming meeting. An in-line CPI likely won't steer the market away from expecting a rate hike. If we enter the FOMC meeting with higher probabilities for a rate hike, the Fed will be forced to hike just to avoid delivering a dovish surprise.