Central Bank Monitoring Overview:
- The odds of a BoE rate hike continue to rise: the final interest rate for 2022 has risen to 2.827%, from 2.099% in mid-May.
- The European Central Bank is expected to raise interest rates by 150 basis points through 2022.
- Retailer positioning and suggest Both EUR/USD and GBP/USD rates have a mixed bias.
More price hike
In this edition of Central Bank Watch, we’ll cover The two main central banks in Europe: the Bank of England and the European Central Bank. While both the eurozone and the UK struggle with declining growth rates, policy makers remain squarely focused on taming multi-decade high inflation. The prospects for rate hikes have jumped dramatically for both the Bank of England and the European Central Bank, with at least 150 basis points discounted from the hikes through to the end of 2022.
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BOE high odds keep climbing
Sterling has proven resilient in recent weeks, undoubtedly supported by the ever-rising prospects for a Bank of England rate hike. UK inflation continues to rise, and with little sign that rises in food and energy prices will stop any time soon, price markets are now fiercer than they have been all year in terms of the prospects for a BoE hike.
Bank of England interest rate forecast (23 June 2022) (Table 1)
UK Overnight Index Swaps (OIS) discount a 199% chance of a 25bp rate hike in August (100% chance of a 25bp hike and 99% chance of a 50bp hike). Price markets are pricing in another 50 basis point hike in September, and again in November. The Bank of England’s projected final rate in 2022 is now settling at 2.827%, up from 2.099% in mid-May.
IG Client Sentiment Index: GBP/USD Price Forecast (23 June 2022) (Chart 1)
GBP/USD: Retail trader data shows 72.71% of traders are net long with the proportion of traders taking long to yellow at 2.66 to 1. The number of long-term traders is 3.97% higher than yesterday and 4.83% lower than the week The number of short traders increased by 0.70% from yesterday, and 15.62% higher than last week.
We usually take a conflicting view with crowd sentiment, and the fact that traders are holding suggests that GBP/USD prices may continue to fall.
Positioning is longer net than yesterday but less net buy than last week. The combination of current sentiment and recent changes gives us more mixed bias in GBP/USD trading.
Taming inflation and preventing fragmentation
Less than a week after the European Central Bank policy meeting in June, the Governing Council convened again in order to calm the eurozone sovereign bond markets. Peripheral bond yields, particularly those in Greece and Italy, are beginning to expand rapidly against their core counterparts (such as German), reviving fears of a reactivation of the eurozone debt crisis.However, since the vague and ambiguous notes from the European Central Bank on preventing fragmentation in the bond markets, Greek and Italian bond yields have calmed down in a way enough to allay concerns.
ECB Interest Rate Forecast (23 June 2022) (Table 2)
The Eurozone OIS is now discounting a 30 basis point rate hike in July (295% chance of a 10 basis point rate hike), in line with what most ECB policy makers have suggested in recent weeks. €STR, which replaced EONIA, is priced at 156 basis points per second through the end of 2022, up from 60 basis points at the end of April. The expectations gap between the ECB and other major central banks continues to close, which should help insulate the EUR from the most significant downside (as long as the rate hike remains elevated).
IG Client Sentiment Index: EUR/USD Price Forecast (23 June 2022) (Chart 2)
EUR/USD: Retail trader data shows that 66.09% of traders are net long with the ratio of traders taking long to yellow at 1.95 to 1. The number of long-term traders is 3.63% lower than yesterday and 11.98% lower than last week. While the number of short traders is 4.05% lower than yesterday and 19.48% higher than last week.
We usually take a conflicting view with crowd sentiment, and the fact that traders are holding indicates that EUR/USD prices may continue to fall.
Positioning is longer net than yesterday but less net buy than last week. The combination of current sentiment and recent changes gives us more mixed bias in EUR/USD trading.
— Written by Christopher Vecchio, Chartered Financial Analyst, Chief Strategist