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Central Banking: BOE & ECB Interest Rate Expectation Update


Central Bank Watch Overview:

  • Bank of England’s chances of interest rate hikes continue to rise: the closing rate of 2022 is up to 2.827%, from 2.099% to mid-May.
  • The European Central Bank is expected to increase rates by 150 bps by 2022.
  • Retailer positioning suggest both EUR / USD and GBP / USD rates have a mixed bias.

Even more tariff increases

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. While both the Eurozone and the UK are struggling with declining growth rates, policymakers remain squarely focused on taming multi-decade highs in inflation rates. Chances of rate hikes have risen significantly for both the BOE and the ECB, with at least 150-bps hikes discounted until the end of 2022.

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

BOE hike continues to climb

The British pound has proven resilient over the past few weeks, no doubt fueled by the steady rise in BOE rate hikes. UK inflation rates continue to rise, and with little sign that food and energy price rises will stop any time soon, rate markets are now the most aggressive they have been all year in terms of BOE hike.

Bank of England Interest Rate Expectations (23 June 2022) (Table 1)

UK Overnight Index Exchange Transactions (EIAs) discount a 199% chance of a 25-bps rate hike in August (a 100% chance of a 25-bps hike and a 99% chance of a 50 -bps increase). Tariff markets price another 50-bps rate hike in September, and again in November. The expected terminal rate for the BOE in 2022 now stands at 2,827%, up from 2,099% in mid-May.

IG Client Sentiment Index: GBP / USD Rate Forecast (23 June 2022) (Chart 1)

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

GBP / USD: Retailer data shows that 72.71% of traders are net long with the ratio of traders long to short at 2.66 to 1. The number of traders net long is 3.97% higher than yesterday and 4.83% lower from last week while the number of traders net short 0.70% higher than yesterday and 15.62% 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.

Positioning is more net long than yesterday, but less net long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP / USD trading bias.

Tame inflation, prevent fragmentation

Less than a week after the European Central Bank’s June policy meeting, the Governing Body met again to calm sovereign bond markets in the eurozone. Peripheral bond yields, especially those in Greece and Italy, began to expand rapidly against their core (eg German) counterparts, rekindling fears of a resurgent eurozone debt crisis.Yet since the ECB’s cryptic and vague remarks on preventing fragmentation in bond markets, Greek and Italian bond yields have calmed down sufficiently to curb fears.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (23 June 2022) (TABLE 2)

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

Eurozone EIA is now discounting a 30-bps rate hike in July (295% chance of a 10-bps rate hike), in line with what most ECB policymakers have suggested in recent weeks. € STR, which replaced EONIA, is now priced for 156-bps more increases by the end of 2022, from 60-bps at the end of April. The expectation gap between the ECB and other major central banks continues to close, which should help isolate the Euro from more significant downside (as long as rate hikes continue to rise).

IG Client Sentiment Index: EUR / USD Rate Forecast (June 23, 2022) (Chart 2)

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

EUR / USD: Retailer data shows 66.09% of traders are net long with the ratio of traders long to short at 1.95 to 1. The number of traders net long is 3.63% lower than yesterday and 11.98% lower from last week while the number of traders net short is 4.05% lower than yesterday and 19.48% higher than last week.

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

Positioning is more net long than yesterday, but less net long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR / USD trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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