Monthly house view | August 2026
Renewed conflict in the Middle East has again disrupted global energy markets. Iran’s closure of the Strait of Hormuz has slashed oil tanker traffic through the narrow waterway and Houthi attacks in the Red Sea have added a new complication.
These shocks, layered onto the emergence of AI-related “techflation,” are increasing inflationary risks and forcing a hawkish repricing across bond markets. Markets now price in almost two rate hikes from the Federal Reserve, the European Central Bank and the Bank of England by year-end.
At the same time, US CPI surprised to the downside in June and Fed Chair Kevin Warsh sounded surprisingly dovish and somewhat confusing at the July meeting, leaving investors concerned over his willingness, and ability, to keep inflation under control. In Europe, activity data have been fairly resilient to higher energy prices while inflation risks will keep the ECB on high alert going into September.
The UK backdrop is more dovish. Softer labour-market data and lower energy and food prices have pushed headline inflation down, with core inflation also easing. The new British Prime Minister Andy Burnham is advocating policies that are aimed at easing the cost-of-living squeeze, with investors still concerned over the extent of additional government spending.
Japan presents a different mix. The yen dropped to a multi-decade low against the dollar, prompting the authorities to intervene more forcefully in currency markets, in a historical move coordinated with the US. The BoJ sounded more hawkish and is prepared to hike policy rates faster if inflation surprises to the upside in coming months.
