Many traders are now reconsidering their attitude towards rates as the ECB is likely to act more aggressively than previously thought. They believe that the central bank will hike rates as early as the end of this year.
Currently, projections point to a 10 basis point tightening in September, after concerns on the rapidly spreading omicron eased. A more realistic timeline is in October, followed by two more increases of similar size in February and March 2023.
These forecasts emerged after the Fed hinted that it may lift rates in March, and after JPMorgan CEO Jamie Dimon said rates may increase by as much as seven times this year. Meanwhile, Morgan Stanley strategists said rates may soar by 25 basis points four times this year.
But not everyone believes that the ECB will also hike rates this year, especially since the UBS is confident that inflation will gradually reduce this year. According to their forecast, the ECB will raise its deposit rate in mid-2023 after winding down the bond purchase program.
That is very much in contrast with the plans of the Bank of England, which is set to raise rates to 0.5% next month. Many say that under such a scenario, the central bank will begin to reduce its record balance sheet, stopping the reinvestment of delinquent bonds.
However, that could backfire quite badly, as it would risk borrowing costs rising faster, which would thwart UK Treasury Secretary Rishi Sunak's plans to clean up public finances.
Currently, 10-year yields have risen by more than 40 basis points since the Bank of England raised rates in December. With such a development of events, yields are likely to hit above 1.20%.
The bank is taking such an aggressive action because UK inflation is already nearing a 30-year high of 6%. This makes markets anticipate an early rate hike on February 3.
Most likely, decisions will be finalized after the release of UK employment reports today. Good performance in jobless claims and overall unemployment rate will boost expectations for a more aggressive rate hike this year.
Talking about EUR/USD, bulls took a very active position defending the support level of 1.1390. That is why all they need right now is to regain control over 1.1420 to set off a jump towards 1.1450 and 1.1490. But if the bears take control of 1.1390, the pair will decrease to 1.1350 and 1.1320.
In GBP/USD, bulls need to make more efforts to get beyond 1.3655. Only a breakout of this level will prompt a rise to 1.3700 and 1.3740. Otherwise, the pair will drop to 1.3610, and then to 1.3560 and 1.3530.