BOE and ECB hikes incoming

Both central banks are expected to hike by 50bps, but for different reasons that could provide disparate reactions in the market.

The BOE is trying to stave off stagflation

Inflation in the UK is still stubbornly in the double digits, but both the BOE and the Treasury acknowledge that the country is already in a recession, despite not having yet accumulated two consecutive quarters of negative growth. This puts the central bank in a challenging situation since the typical deflationary effect of a recession hasn't manifested. Meanwhile, the usual way to relieve the effects of inflation, which is to increase spending, cannot be relied on because of high debt and inflation already.

This could lead to increasing fragmentation of the vote from the MPC. There already has been a three-way split, but there could be a four-way split this time around: votes in favour of no change, 25bps, 50bps and 75bps. Investors will likely be calibrating future expectations based on the vote split; if more are concentrated at or above 50bps, it might mean the tighter policy is coming. But if more are split at 25bps or less, it might give a sense that the BOE is starting to waver in its tightening.

ECB keeping options open

The shared economy isn't in a recession like the UK, but it isn't doing so well. Europe has managed to reduce its consumption of energy, one of the main drivers of inflation, without substantially hurting reported industrial production so far. Of course, the full effect of winter has yet to be felt. In the meantime, the consensus is leaning towards the ECB slowing the pace.

The ECB meets after the Fed, and it could consider the impact of the FOMC and raise a similar amount. The minutes from the last ECB meeting emphasised the progress made by the tightening. Something markets have taken as a sign that the ECB will slow the pace at the last meeting of the year. But, the accompanying statement is expected to be hawkish, giving the bank leeway to take more action next year after Q4 data becomes available.

With the ECB seen as having more room to hike than the BOE, the balance of the meetings might lead to Euro strength against the pound.

EURGBP

Euro has been descending against the pound. Still, lower troughs have yet to be able to distance themselves from lower peaks significantly to bring prices further down. This has allowed the pair to form a pattern akin to a falling wedge.

0.8545 (S1) is the main floor bears that need cutting through to get to 0.85 (S2) and 0.84 (S3). On the flip side, if 0.8646 (R1) fails to hold bulls, it opens the door to 0.87(R2) and 0.8823 (R3).

Key takeaways

Both BOE and ECB are expected to raise interest rates by 50bps but for different reasons. The UK is already in a recession, but inflation has yet to decline. This could lead to various members of the bank voting for other things. Meanwhile, the European economy is not in a recession, and the main drivers of inflation have come down. The ECB is expected to slow the pace of interest rate hikes at its next meeting, but the statement accompanying this decision is expected to be hawkish. This could lead to Euro strength against the pound.