Home Daily Commentaries The European Central Bank raised interest rates

The European Central Bank raised interest rates

Friday 28 October, 2022

Daily Currency Update

After a momentous week of political focus in the UK, Sterling will now be turning to next week's Bank of England decision for focus. Fiscal policy has been in focus for the pound, and Sunak's new government has been generally perceived as one that can bring the right fiscal policy to the table that will give the market the calm it needs after the infamous Truss and Kwarteng budget that sent the pound plummeting. Sterling has risen in what has been described as a mini 'Rishi rally' post the announcement this week that Rishi Sunak, ex chancellor, has become the 57th prime minister of the UK. However, with the next budget by Jeremy Hunt postponed to November 17th, focus now turns to how the UK central bank's monetary policy decisions can complement the government's intended fiscal policy. The market will also focus on what the Bank of England intends to do about its quantitative easing or tightening plan, and some have argued that it would have been more suitable for them to have heard the government's budget plans ahead of releasing its latest monetary policy decisions next Thursday. The market is pricing in somewhere between a 50bp and 75bp interest rate hike from the BoE. It will follow some aggressive rate hikes from both the ECB and US Federal Reserve in recent weeks.

Key Movers

The US dollar has the potential to remain strong into the winter, as expectations remain for a global economic slowdown and continued inflation concerns. There are also plenty of other risk factors including wars and supply chain concerns which play into the US dollar strength rhetoric. Investors tend to move towards the safe-haven US dollar during risky climates. The European Central Bank hiked its interest rates by a further 75bps yesterday, doubling its base rate, but in some ways, it could have been described as a dovish hike. Though Lagarde indicated that further interest rate hikes are certainly needed, and the central bank is laser focussed in bringing back inflation to the 2% target, in the short term, the ECB may be hamstrung by global macroeconomic factors and the War in Ukraine when making its future decisions. With this, the euro appears to be on the backfoot, with EURUSD heading back below parity having spent some this week above this psychological level.  

Expected Ranges

  • GBP/USD: 1.1480 - 1.1565 ▲
  • GBP/EUR: 1.1510 - 1.1605 ▲
  • GBP/AUD: 1.7885 - 1.8065 ▲
  • EUR/USD: 0.9875 - 1.0015 ▼