Home Daily Commentaries ECB interest rates to remain high for as long as needed

ECB interest rates to remain high for as long as needed

Daily Currency Update

The UK’s annual inflation rate slowed to 6.7% last month which is showing the slowdown of inflation. The Bank of England took advantage of this positive news, that left the interest rate unchanged, albeit in a very tight vote of five to four. The pound went on to perform the worst out of the G10 currencies following the BoE meeting.

The Monetary Policy Committee kept the door open to additional policy tightening, although there is now a general sense that the bank is looking to finish up the hiking cycle. Interest rate pricing after the meeting suggests as much, with the markets now expecting less than a 50/50 chance of a final 25bp hike by year-end.

The pound’s performance is clearly tied to expectations for interest rate hikes in the UK, and these in turn will likely depend on future inflation data. Policymakers also voiced heightened concerns over the UK growth outlook, while downgrading their Q3 GDP assessment to near flat growth. Revised data on second quarter growth will be released on Thursday.

Key Movers

The key US 10-year Treasury has broken multi-decade highs. Risk assets worldwide tumbled whilst stocks and commodities fell. The attention now shifts to economic data. Central banks are hoping that current interest rate levels are sufficient to put inflation on a downward trajectory. Incoming inflation data is, therefore, now more important than ever.

This week's flash CPI report will be key for the euro. Markets are expecting a significant drop in both the headline and core prints. Expectations for further interest rate hikes are priced in. European Central Bank President, Lagarde, spoke yesterday addressing the most recent 25 bps hike, which ultimately led to the Euro trading lower versus the pound and dollar. This was due to the lack of economic growth in the eurozone.

Expected Ranges

  • GBP/USD: 1.21673 - 1.22147 ▼
  • GBP/EUR: 1.14931 - 1.15363 ▼
  • GBP/AUD: 1.89813 - 1.90515 ▼
  • EUR/USD: 1.05698 - 1.06000 ▼