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Central Banking: BOE & ECB Interest Rate Expectation Update


Central Bank See Overview:

  • Bank of England’s chances of interest rate hikes stagnate: the 2022 terminal rate has fallen from 2.176% to 2.099% over the past three weeks.
  • Now that several European Central Bank policymakers have suggested that an interest rate hike is possible in July, rate markets are pricing 100-bps of tightening by the end of 2022.
  • Retailer positioning suggest both EUR / USD and GBP / USD rates have a bullish bias.

Divergence between central banks

In this issue of Central Bank Watch, we will cover the two major central banks in Europe: the Bank of England and the European Central Bank. There has been some of a difference between the BOE and ECB in recent weeks, with the former indicating that it will not accelerate its pace of interest rate hikes, while the latter has given clear signals that it will move faster than the previously proposed timeline. This narrowing expectation gap between the BOE and the ECB could soon cause a fortune change for EUR / GBP, EUR / USD and GBP / USD rates.

For more information on central banks, please visit the techlives Central Bank Release Calendar.

BOE Hike Odds Stall

Bank of England policymakers are apparently at odds with the UK government, with the central bank warning of a significant negative impact on the cost of living in the UK, while Prime Minister Boris Johnson throws away any such concerns. But as understood by the May BOE rate decision, the Monetary Policy Committee seems to be just as concerned about the downward risks to growth as it is with the upside risks to inflation, and therefore gives no reason for traders to believe that the BOE is slowing their rate. will not accelerate. hikes during 2022.

Bank of England Interest Rate Expectations (17 May 2022) (Table 1)

UK Overnight Index Exchange Transactions (EIAs) discount a 133% chance of a 25-bps rate hike in June (a 100% chance of a 25-bps hike and a 33% chance of a 50-bps -increase). Tariff markets continue to price a 25-bps interest rate hike at each meeting for the remainder of 2022. And while it lyk aggressively, it is a relatively slower pace than expected at the end of April: the expected terminal rate for the BOE in 2022 now sits at 2.099%, down from 2.176% less than three weeks ago.

IG Client Sentiment Index: GBP / USD Rate Forecast (17 May 2022) (Chart 1)

Central Bank Watch: BOE & amp;  ECB interest rate expectations update

GBP / USD: Retailer data shows 71.23% of traders are net long with the ratio of traders long to short at 2.48 to 1. The number of traders net long is 16.25% lower than yesterday and 19.35% lower from last week while the number of traders net short is 20.50% higher than yesterday and 32.18% higher from last week.

We usually take a contradictory view of crowd sentiment, and the fact that traders are just long suggests that GBP / USD prices may continue to fall.

Yet traders are less net long than yesterday and compared to last week. Recent changes in sentiment warn that the current GBP / USD price trend may soon reverse higher, despite the fact that traders are only staying long.

ECB buckles under pressure

How fast can things change. At their meeting late-Aprilthe European Central Bank proposed an end to stimulus efforts in 3Q’22 remains the most likely course of action, with rate hikes following shortly thereafter. But as the Russian invasion of Ukraine continued, inflation became more entrenched, demanding a reconsideration by several members of the Governing Body.

Last week, ECB President Christine Lagarde said she would support a 10-bps rate hike in July, followed by similar remarks by ECB Governing Body member Mario Centeno today. ECB Governing Body mkole Klaas Knot went a little further and suggested that a 50-bps rate increase should be on the table.

What this means is that the gap between the ECB and interest rate hikes has closed, with the market winning. It now appears that the ECB will end asset purchases at their next meeting in June, paving the way for policy tightening in July. More importantly, as the ECB succumbed to inflationary pressures, markets are now predicting a faster pace of interest rate hikes over the course of 2022.

EUROPEAN CENTRAL BANK INTEREST RATE RATE EXPECTATIONS (17 May 2022) (TABLE 2)

Central Bank Watch: BOE & amp;  ECB interest rate expectation update

Eurozone EIA is now discounting a 20-bps rate hike in July (266% chance), a dramatic increase in the more modest prices back at the end of April. € STR, which replaced EONIA, is now priced for 100-bps increases through the end of 2022, from 60-bps at the end of April. While the ECB continues to lag behind other major central banks in terms of expected interest rate hikes, the expectations gap has closed significantly, which should help isolate the Euro from more significant downside (as long as price hikes continue to increase).

IG Client Sentiment Index: EUR / USD Rate Forecast (17 May 2022) (Chart 2)

Central Bank Watch: BOE & amp;  ECB interest rate expectation update

EUR / USD: Retailer data shows 68.78% of traders are net long with the ratio of traders long to short at 2.20 to 1. The number of traders net long is 10.78% lower than yesterday and 8.33% lower from last week, while the number of traders is just 20.02% higher than yesterday and 8.44% higher from last week.

We usually have a conflicting view of crowd sentiment, and the fact that traders are only long indicates that EUR / USD prices may continue to fall.

Yet traders are less net long than yesterday and compared to last week. Recent changes in sentiment warn that the current EUR / USD price trend may soon reverse higher despite the fact that traders are only staying long.

— Written by Christopher Vecchio, CFA, Senior Strategist

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