Central Bank Watch: BOE & ECB Interest Rate Expectations Update

IG Client Sentiment Index: GBP/USD Rate Forecast (June 10, 2021) (Chart 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

GBP/USD: Retail trader data shows 39.85% of traders are net-long with the ratio of traders short to long at 1.51 to 1. The number of traders net-long is 22.05% lower than yesterday and 21.90% lower from last week, while the number of traders net-short is 8.61% higher than yesterday and 16.34% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bullish contrarian trading bias.

ECB Hints at Divisions Within

Ahead of the June ECB policy meeting, ECB Governing Council member Klaas Knot said that higher yields are welcomed because “what the market is actually doing is pricing that optimism” about a recovery in the second half of 2021. It appears that this attitude regarding the Eurozone’s economic recovery is becoming infectious among ECB policymakers.

At the June meeting press conference, ECB President Christine Lagarde hinted at growing divisions within the Governing Council even as she suggested that inflation “remain subdued” amid “still significant economic slack.” The ECB president noted that at least three individuals (among the 25 decision makers) wanted to scale back asset purchases, and a report emerged after the press conference that there were additional policymakers who expressed concern about continuing large scale asset purchases through thinner markets in the summer months.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (June 10, 2021) (TABLE 2)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

If anything, the September ECB meeting – the next one that will produce a new Staff Economic Projections – will be of interest, seeing as how any bond market volatility over the summer could provoke a significant rethink in ECB policies. Like the Federal Reserve, the other side of summer may mark the beginning of the end of the ECB’s asset purchases (which the BOE and Bank of Canada have already started to scale back, to various degrees).

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