FX.co ★ Bund Yields Fall as Oil Prices Drop

German 10-year Bund yields slipped to 3.2%, hovering near their lowest level since August 14, as declining oil prices fueled hopes that the Strait of Hormuz could reopen and traders reassessed the outlook for European Central Bank (ECB) interest rates. Iran announced it had resumed talks with Oman on managing traffic through the Strait, rekindling optimism that this crucial shipping route could reopen and alleviate disruptions to energy supplies.

At the same time, Reuters reported that ECB policymakers are prepared to raise rates at their September meeting to contain the economic fallout from the war involving Iran, but are hesitant to signal further tightening beyond that point. Separately, ECB Executive Board member Isabel Schnabel warned that rates may still need to increase as the conflict in the Middle East continues, pointing to upside risks to inflation stemming from the resilience of the euro-area economy.

Money markets were pricing in less than 40 basis points of additional ECB tightening by the end of the year, with a September rate hike almost fully anticipated.