Updated interest rate forecasts from the BOE and the ECB

Overview of central bank supervision:

  • The odds of a Bank of England rate hike continue to rise: the 2022 terminal rate is up to 2.827% from 2.099% in mid-May.
  • The European Central Bank is expected to raise rates by 150 basis points through 2022.
  • retail trader positioning suggests EUR/USD and GBP/USD both have a mixed bias.

More rate hikes

In this edition of Central Bank Watch, we will discuss the two major European central banks: the Bank of England and the European Central Bank. As the Eurozone and the UK grapple with declining growth rates, policymakers remain resolutely focused on containing the highest inflation rates in decades. Rate hike odds have jumped significantly for both the BOE and the ECB, with at least 150 basis points of hikes discounted through the end of 2022.

For more information on central banks, please see the DailyFX central bank release schedule.

BOE Touring Ratings Continue to Rise

The British Pound has been resilient in recent weeks, no doubt fueled by the continued rise in BOE rate hike odds. Inflation rates in the UK continue to rise, and with few signs that food and energy price rises will soon come to a halt, interest rate markets are now the most aggressive of all. the year in terms of the probability of a rise in the BOE.

Bank of England interest rate expectations (June 23, 2022) (Table 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

UK overnight index swaps (OIS) discount a 199% chance of a 25bps rate hike in August (a 100% chance of a 25bps hike and a chance 99% of a 50 basis point increase). Rates markets are pricing in a further 50 basis point rate hike in September, then again in November. The expected terminal rate for the BOE in 2022 now stands at 2.827%, down from 2.099% in mid-May.

IG Customer Confidence Index: GBP/USD Rate Forecast (June 23, 2022) (Chart 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

GBP/USD: Retail trader data shows 72.71% of traders are net long with a ratio of long to short traders of 2.66 to 1. The number of net long traders is 3.97% higher than yesterday and 4.83% lower than last week, while the number of net-short traders is 0.70% higher than yesterday and 15.62% higher than this week last.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net buyers suggests that GBP/USD prices may continue lower.

Positioning is longer than yesterday but shorter since last week. The combination of current sentiment and recent changes gives us another GBP/USD mixed trading bias.

Control inflation, prevent fragmentation

Less than a week after the European Central Bank’s June policy meeting, the Governing Council met again to calm eurozone sovereign bond markets. Peripheral bond yields, particularly those of Greece and Italy, have started to deviate rapidly from their central counterparts (e.g. Germany), reigniting fears of a renewed debt crisis in the area. euro.Yet since the ECB’s cryptic and vague remarks about preventing bond market fragmentation, Greek and Italian bond yields have calmed enough to ward off fears.

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

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

Eurozone OIS are now pricing in a 30bp rate hike in July (295% chance of a 10bp rate hike), in line with what most ECB policymakers have suggested those last weeks. The €STR, which replaced the EONIA, is now priced for further increases of 156 basis points until the end of 2022, compared to 60 basis points at the end of April. The expectation gap between the ECB and other major central banks continues to close, which should help shield the Euro from further decline (as long as the pricing of the rate hike remains elevated).

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

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

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

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that EUR/USD prices may continue to decline.

Positioning is longer than yesterday but shorter since last week. The combination of current sentiment and recent shifts gives us another mixed trading bias for EUR/USD.

— Written by Christopher Vecchio, CFA, Senior Strategist

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