European Stocks Set to Open Lower as ECB Rate Hike Looms, Middle East Tensions Intensify

European stocks are set for a broadly lower open on Wednesday, with rising energy costs from the intensifying Middle East conflict and the approaching ECB rate decision weighing on sentiment.

Brent crude futures rose toward $100 a barrel, according to RTTNews, as renewed tensions in the Gulf region raised concerns about further disruptions to global oil supplies. European gas prices have hit their highest since early 2023, as reported by multiple outlets, driven by the ongoing U.S.-Iran war.

The escalation accelerated after Iran launched a barrage of missiles targeting U.S. military positions in Jordan and warned tanker crews in Bahrain and Kuwait to "immediately abandon their vessels," following U.S. destruction of five Iranian tankers in the Gulf of Oman and near Kharg Island, a major crude export hub. RTTNews reported that a U.S. official said the strikes came in response to alleged attempts by Iran to target a U.S. warship with ballistic missiles.

Separately, over the weekend the U.S. military targeted three additional Iranian oil tankers after ballistic missiles were launched towards U.S. warships. In retaliation, Iran attacked a U.S. naval drone trying to enter the Strait of Hormuz, and the Revolutionary Guard Corps warned ships not to attempt transit on approved routes. Iran's top security official announced a new restricted zone would be established outside the Strait, adding to uncertainty around energy shipments through the strategic waterway.

**ECB Rate Hike All but Certain**

The European Central Bank is widely expected to raise its deposit rate by 25 basis points to 2.5% at the conclusion of its two-day meeting on Thursday. Market odds put the probability at close to certainty, with traders fully pricing in the move.

"Another insurance rate hike," said ING's global head of macro Carsten Brzeski, according to reports from cyprus-mail.com and rte.ie. "Or for those who don't like this term: a dovish rate hike."

The decision follows eurozone inflation hitting 3.3% in August, up from 2.9% in July and the highest since September 2023, driven by a surge in energy inflation to 14.3% from 10.3%. However, core inflation, which strips out energy and food, actually fell to 2.4% from 2.5%. Services inflation, closely tied to wages and domestic demand, dropped to 3% from 3.3%, euronews.com reported.

ECB economists have found that adverse energy supply factors, driven by geopolitical tensions, accounted for around 90% of the rise in energy inflation between January and May. "This time the energy supply shock dominates, while demand and public policy stimulus have minor roles," the economists wrote in a paper published Tuesday.

The lack of so-called second-round effects — where expensive energy feeds through into broader price increases — is the strongest argument against tightening, according to analysts.

**Growth Projections and Forward Guidance**

Economists expect the ECB's new inflation and growth forecasts to remain broadly unchanged, though some anticipate GDP estimates could be nudged higher. Euro zone business activity continues to post solid growth, matching its pace from July which was the fastest this year, according to S&P Global data for August.

"The ECB will probably revise up their 2026 growth forecast slightly," SEB macro economist Pia Fromlet told cyprus-mail.com and rte.ie.

Policymakers have little appetite to signal further rate increases, but traders still anticipate a high chance of another move by December and one more next year, reflecting energy costs. Most economists polled by Reuters think the ECB will be done after September, sources reported.

MarketWatch reported that ING economists expect ECB President Christine Lagarde to keep her options open and push back against the current bond-market consensus that there will be another three quarter-point increases by June 2027.

**Global Central Bank Context and Trade Tensions**

The ECB is not acting alone. The Federal Reserve meets on September 15-16, with markets now pricing about a 60% chance of a rate hike to 3.75%-4%, according to RTTNews. Fed Chair Kevin Warsh used his Jackson Hole address to argue that financial conditions are not restrictive and underlying inflation has not improved, euronews.com noted.

The Bank of Japan follows on September 17-18, with markets pricing an 80% to 90% chance of a move to 1.25%. The Bank of England is expected to hold rates at 3.75% on September 17.

The U.S. dollar wobbled in Asian trade on Wednesday, while gold edged up 0.7% to $4,387 an ounce after falling for three straight sessions, RTTNews reported.

Renewed trade tensions between the U.S. and Canada also weighed on sentiment. The White House said a ban on imports of some dairy products and motorcycles from Canada, along with most alcoholic beverages, would take effect on September 29, escalating the trade war. Canada matched U.S. tariffs "dollar-for-dollar," impacting 700 products, according to RTTNews.

**Bond Market and Broader Concerns**

Rising global borrowing costs have tightened financial conditions, doing some of the ECB's work. Ten-year borrowing costs in France and Italy are up around 65 basis points each this year, while Germany's have climbed 50 basis points, cyprus-mail.com and rte.ie reported.

"The ECB is always careful in how it talks about long-dated bonds and is likely to stress that only if the moves are out of line with the fundamentals are they likely to act," said Michael Metcalfe, head of macro strategy at State Street, as quoted by those outlets. "That doesn't seem to be the case."

European officials expressed annoyance that the U.S. did not give them a customary heads-up that selling euros, not dollars, was part of a recent yen-bolstering intervention, sources told Reuters and were reported by cyprus-mail.com and rte.ie. The move worried European central bankers as a sign of more interventionist U.S. policy breaking with norms.

U.S. stocks closed lower on Tuesday, with the Dow tumbling 1.2%, the S&P 500 shedding 0.6%, and the Nasdaq Composite dropping 0.3%. European stocks ended muted on Tuesday, with the pan-European STOXX 600 finishing marginally lower, the German DAX little changed, France's CAC 40 edging up 0.1%, and the U.K.'s FTSE 100 edging down marginally.

Asian stocks were mixed early Wednesday, with chip stocks extending recent gains on sustained interest in artificial intelligence, though the overall session was muted.