BOE and ECB to Hike by 50bps, But What's Next?

Both banks are expected to raise rates by 50bps within very different contexts, which could imply disparate reactions in the market and volatility in the EURGBP. 

BOE: It All Comes Down To The Vote Count

The first to pull the trigger is the BOE, which deals with the dual problems of a country in recession while inflation remains stubbornly in the double digits. This has led to a divide among the members of the bank's MPC on how to deal with the situation. A small contingent has opted for deprioritising inflation to support the economy, while the majority have supported raising rates. Traders will likely pay close attention to the vote split to see if the doves have managed to recruit more supporters, which could mean further rate hikes would be more difficult

The latest poll shows that the market expects 50bps at the coming meeting, followed by 25bps in March. That would bring the rate up to 4.50%, and the expectation is that the BOE would hold it there. But by the end of the year, the deteriorating economic situation would force the bank to cut rates. This has kept the pound relatively weaker, as "tough talk" by Bailey is seen to be coming up against the reality that the BOE will have to slow hikes. Economists admit that inflation might continue to plague the UK and that the market might be overly optimistic about where the top rate could be.

ECB: Data Is Good, But Not Great

The latest data pointed to how the ECB is facing a complex scenario. The EuroZone as a whole managed to record positive preliminary growth. But that was thanks primarily to technical issues related to taxation in Ireland. The largest economy in the Area recorded negative growth, with the German Bundesbank expecting the country to fall into a technical recession. Italy also reported preliminary negative growth for the quarter.

Meanwhile, core inflation remains sticky, with the countries reporting Jan numbers so far seeing little progress. ECB members have been discussing the need to raise rates aggressively, but when it came to the vote last time, they opted for a smaller hike. The consensus is that the European bank will hike by another 50bps later today, followed by another 25bps in March, when QT is expected to kick in. Traders will likely pay close attention to Lagarde's comments to see if they align with those forecasts.

EUR/GBP Forms Double Top For Now

Recently, EUR/GBP marginally breached the top of 0.8898 to mark a false break at the 0.89 handle. But it did so after printing a bullish pennant pattern, with the measured move offering potential for an upward leg to 0.8972. If prices pull back deeper and lose the breakout point near 0.8836, the pattern would be invalidated at 0.8762. Breaking to lower territories might change the trend, with 0.8722 as a last resort. 

Source: Spreadex

Key Takeaways

BOE and ECB are expected to raise rates by 50bps, with the BOE likely doing so in response to high inflation despite being in recession with the MPC members split on what's best prioritised. On the other hand, the ECB is facing a complex scenario of positive overall growth but negative growth in Germany and Italy, as well as sticky core inflation. Traders will be focused on the BOE vote count to determine the likelihood of further rate hikes and any comments from ECB President Lagarde that could signal changes in the expected forecast of 25bps in March.