Central Banks Watch: BOE & ECB Interest Rate Expectations Update

The End Of Pandemic-Era Easing?

In this edition of Central Bank Watch, we’ll cover the two major central banks in Europe: the Bank of England and the European Central Bank. Earlier this month, the ECB signaled that it was making minor recalibrations to its policy efforts in order to continue to support the Eurozone’s post-pandemic recovery. Now, just hours after the BOE’s September meeting, rates markets are beginning to price in a more aggressive rate hike timeline over the next six months.

After BOE, Rates Markets More Hawkish

The September BOE meeting produced a hawkish surprise, with a 7-2 vote that QE should remain unchanged. Two policymakers defecting towards more stimulus withdrawal caught markets off-guard, which have since recalibrated to anticipate a faster timeline on stimulus withdrawal over the coming months. The November Quarterly Inflation Report (QIR) may harken to the end of QE with rate hikes not too far around the corner.

Bank Of England Interest Rate Expectations (September 23, 2021) (Table 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

UK overnight index swaps have been steadily advancing in recent weeks, and that continued today. After the August QIR, UK OIS were pricing in March 2020 as the likeliest period for the first-rate hike. In early September, UK overnight index swaps were suggesting that May 2022 – a meeting that will produce a new QIR – has the greatest odds of seeing the main rate liftoff. Now, after the September BOE meeting, rates markets are eying February 2022 for a 15-bps rate hike (71% chance).

IG Client Sentiment Index: GBP/USD  Rate Forecast (September 23, 2021) (Chart 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

GBP/USD: Retail trader data shows 73.46% of traders are net-long with the ratio of traders long to short at 2.77 to 1. The number of traders net-long is 2.04% higher than yesterday and 56.35% higher from last week, while the number of traders net-short is 11.47% lower than yesterday and 37.80% lower from last week.

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

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Disclosure: DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. ( more

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