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Update expectations on the BOE and ECB interest rates

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Central Bank See review:

  • The chances of raising the rate of the Bank of England are stagnating: the terminal rate in 2022 fell from 2.176% to 2.099% over the past three weeks.
  • Now that several European Central Bank politicians have suggested that a rate hike is possible in July, markets are setting prices at 100 bp. by the end of 2022.
  • Retailer positioning suggests both EUR / USD and GBP / USD rates have a bullish bias.

Divergence between central banks

In this issue of Central Bank Watch we will tell the two main central banks in Europe: the Bank of England and the European Central Bank. In recent weeks, there has been some disagreement between the Bank of England and the ECB, with the former showing that it will not accelerate the rate hike, while the latter has given clear signals that it will shift earlier than previously proposed. This narrowing of the gap in expectations between the Bank of England and the ECB may soon lead to a change of destiny for EUR / GBP, euro/USDand GBPUS dollar exchange rates.

For more information on central banks, please visit the page Central Bank DailyFX release calendar.

BOE Hike Stall Odds

Bank of England politicians seem to disagree with the UK government, the central bank warns of a significant negative impact on the cost of living in the UK, and Prime Minister Boris Johnson dismisses any such concerns. But as understood in May BOE course The Monetary Policy Committee seems to be equally concerned about the risks of declining growth as the risks of rising inflation, which gives traders no reason to believe that the Bank of England will accelerate the rate increase in 2022.

Interest rate expectations of the Bank of England (May 17, 2022) (Table 1)

In the UK, overnight index swaps (OIS) reduce the probability of a 25 bp rate increase in June by 133% (100% 25 bp rate increase and 33% 50 bp rate increase). At each meeting until the end of 2022, tariff markets continue to raise rates by 25 bps. And at the same time it seems aggressive, it is relatively slower than expected in late April: the expected terminal rate for BOE in 2022 is now 2.099%, which is less than 2.176% less than three weeks ago.

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

Central Bank Watch: BOE & Update ECB Interest Rate Expectations

GBP / USD: Data from retail traders show that 71.23% of traders are pure longs, and the ratio of long traders to shorts is 2.48 to 1. The number of net-long traders is 16.25% less than yesterday, and 19.35% less than last week, while the number of net-short traders is 20.50% higher than yesterday and 32.18% higher than last week.

Usually we have conflicting views on the mood of the crowd, and the fact that traders are kept online suggests that GBP / USD prices may continue to fall.

However, traders are less network long than yesterday and compared to last week. Recent mood swings warn that the current GBP / USD price trend may soon turn upside down, despite traders remaining clean.

ECB buckles under pressure

How quickly things can change. At their meeting in late AprilThis was suggested by the European Central Bank the cessation of stimulus efforts in the 3rd quarter of 2222 remains the most likely course of action, with a rate hike shortly thereafter. But as the Russian invasion of Ukraine progressed, inflation intensified, requiring a rethinking of various members of the Board of Governors.

Last week, ECB President Christine Lagarde said she would support a 10 bp rate increase in July. The Governing Council of the ECB mAmber Mario Senten today. The Governing Council of the ECB mcharcoal Klaas Knot went a little further, suggesting that a speed increase of 50 bps should be on the table.

This means that the gap between the ECB’s expectations and the rate hike has narrowed and the market has won. It now appears that the ECB will complete the asset purchase at its next meeting in June, paving the way for tightening policies in July. More importantly, as the ECB weakens under inflationary pressures, markets now predict that faster rates will increase during 2022.

EUROPEAN CENTRAL BANK’S EXPECTATIONS FOR PRICE RATES (May 17, 2022) (TABLE 2)

Central Bank Watch: BOE & Update ECB Interest Rate Expectations

The eurozone OIS is now lowering its rate by 20 bps in July (266% probability), much higher than more modest prices in late April. The € STR, which replaced the EONIA, now costs an increase of 100 bps by the end of 2022 compared to the 60-baht at the end of April. While the ECB continues to lag behind other major central banks in terms of expected rate hikes, the gap has narrowed significantly, which should help isolate the euro from more significant declines (as long as rate hikes remain high).

IG Customer Sentiment Index: EUR / USD Forecast (May 17, 2022) (Chart 2)

Central Bank Watch: BOE & Update ECB Interest Rate Expectations

EUR / USD: data from retail traders show that 68.78% of traders are pure longs, and the ratio of long traders to shorts is 2.20 to 1. The number of net-long traders is 10.78% less than yesterday, and 8.33% less than last week, while the number of net-short traders is 20.02% higher than yesterday and 8.44% higher than last week.

Usually we have conflicting views on the mood of the crowd, and the fact that traders are kept online suggests that EUR / USD prices may continue to fall.

However, traders are less network long than yesterday and compared to last week. Recent mood swings warn that the current EUR / USD price trend may soon turn higher, although traders remain clean.

— Written by Christopher Vecchio, CFA, Senior Strategist

https://www.dailyfx.com/forex/fundamental/central_bank_watch/2022/05/17/central-bank-watch-boe-ecb-interest-rate-expectations-update-may-17.html

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