In the FX review this week, we talk through the Bank of England (BoE) hike and the hawkish pivot giving GBP a short-term boost. We also note the repricing in expectations in rates in Europe, causing EUR pairs to get a nice kick higher as the week went on.

Rates moving higher in the UK

Ahead of the BoE meeting on Thursday, we provided an extensive preview which can be seen here. In it we flagged up the importance not just of the hike (which was largely priced in), but the future projection of rates in the UK for the rest of 2022. 

the projection was one of higher expectations, with market participants bringing forward their guidance on how soon it will take for rates to hit 1%. As of the end of the week, it stood at May. This leaves us to conclude that two further hikes are coming before the beginning of summer. One of the main reasons for this was that there were four dissenters in the committee this week. All four wanted to see not a 25bps hike but a 50bps one. This was much more bullish than the market was expecting.

In terms of a reaction, GBP traded higher on the news and press conference. Unfortunately, these gains were short lived versus the EUR and USD. For EUR, the hawkish ECB meeting also on Thursday meant that on balance, traders preferred to be long EUR. As for USD, the dump in the NASDAQ to end the week was enough to see a bid in the greenback across the board.

Looking forward, we do think that there is value in being long GBP, but not against EUR or USD right now. We like to be short havens, so ideally like a long GBPCHF or GBPJPY. For those that think oil is looking toppy (us included), long GBPCAD could also be a nice play.

Hawkish chatter from the ECB

The other main event of the week was the meeting from the ECB. Lagarde flagged up mounting concern around inflation in the Eurozone. The dropping of other dovish terms and the reluctance to rule out hiking interest rates means that the market is looking for a potential hike this summer. 

With the PEPP ending imminently, the central bank isn’t really shackled by anything to resist raising rates this year. We should acknowledge that EUR buyers will still incur negative interest rates, but the shift in stance was still taken as a positive. As a result, EUR/USD took out 1.14 on the topside on Thursday and traded close to 1.15 on Friday.

One of our favorite trades in the past month has been long EUR/CHF, that traded close to the 1.0600 barrier on Friday. We continue to like being long EUR/CHF and think the pair has legs to make it to 1.08/1.09 in coming weeks.

One thought on “The FX Review – February Week 1”

Leave a Reply