Hike rates

The Bank of England is about to raise its rates, what about the ECB? – Ebury United Kingdom

Thursday will be a particularly turbulent day in the financial markets, with the Bank of England and the European Central Bank due to announce their latest policy decisions.

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In the UK, the BoE is widely expected to continue its 15 basis point rate hike in December with a 25 basis point move this afternoon, which would be the first consecutive rate hike since 2004. Although we’ve had little to no communication from MPC members since the last meeting, UK inflation continued to surprise on the upside, omicron risks subsided and investors forecast around 120 basis points of BoE hikes in 2022. With another rate move fully priced in for today’s meeting, the bar for a hawkish surprise is pretty high, and even a unanimous vote or 8-1 may not be enough to support the pound. The Pound has already hit a nearly two-week high around the 1.355 mark against the Dollar ahead of a hawkish message from the MPC today.

With that in mind, the bank’s official communications, Bailey’s press conference and quarterly economic projections could be key to the reaction of the pound. A significant upward revision to inflation forecasts and rhetoric that signals heightened concerns about rising prices in the bank’s statement would be a clear signal for a move higher in the pound. Any comments that leave the door open for an aggressive rate of gains over the rest of the year would also be considered bullish. While we don’t think Bailey will explicitly commit to a quarterly upside, we also don’t think he will push market prices back, and that could provide decent support for the GBP this afternoon.

Almost immediately after the Bank of England’s announcement, the European Central Bank will unveil its latest policy decision. Wednesday’s surprise rise in eurozone inflation (to a new record high of 5.1% vs. 4.4% expected) made today’s Governing Council meeting even more important. So far, ECB President Lagarde has continued to insist that the price spike is “transient” in nature – a description the Federal Reserve abandoned several weeks ago. That insistence that price pressures will ease and higher interest rates won’t be needed anytime soon will be tested to the max today, especially given growing signs of dissent. warmonger among council members. Should the latter become increasingly evident this afternoon, the Euro’s rally, which saw EUR/USD return above the 1.13 level, may have lasted longer this week.

Figure 1: Eurozone inflation rate (2013 – 2022)

Ahead of tomorrow’s US payrolls report, Wednesday’s ADP employment change figure, which charts private sector job creation, was a major disappointment. 301,000 net jobs were shed last month after the market priced a number around the +200,000 mark – the first job contraction since April 2020. While this is clearly a huge On the downside, investors didn’t seem overly concerned given that the drag on jobs was almost entirely due to omicron and therefore will likely be temporary. We would expect a similar subdued currency reaction to such a downside surprise in Friday’s NFP report.

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