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In line with our expectation, the BoE today hiked policy rates by 50bp, bringing the Bank Rate to 3.50%.

We expect the increasingly weak growth outlook to support a near-term ending to the hiking cycle.

We maintain our call for a 25bp hike in February with risks to our call skewed towards additional hikes in 2023 if inflation pressures show increasing persistence.

In line with our expectation, the Bank of England (BoE) hiked the Bank Rate by 50bp to 3.50% with 6 members voting for a 50bp hike, one member voting for 75bp and two members voting for keeping the Bank Rate unchanged. As expected, there was no news in regards to QT-communication as outright selling of government bonds commenced on 1 November.

Overall, the December meeting offered little news, as the MPC judged that there has been limited news in economic data since the projections presented in the November Report. The BoE thus continues to expect a challenging growth backdrop where the UK is "to be in a recession for a prolonged period." This supports our expectation of the Bank nearing the end of its hiking cycle as tighter financial conditions, easing in labour market and the recession tears on the economy. Likewise, the two most dovish members that preferred to leave the Bank Rate unchanged at 3.00% referred to "increasing signs that the downturn was starting to affect the labour market" and the lag in effects of monetary policy as past rate increases "were still to come through". We expect this view to transmit onto the rest of the MPC in the coming months and thus keep the rest of our forecast unchanged, expecting a final 25bp hike in February 2023.

The increased focus from the government led by PM Rishi Sunak on closing the fiscal gap was broadly confirmed by the Autumn Statement on 17 November. On fiscal policy, the MPC thus estimates that "the overall impact on CPI inflation projection at all of these horizons is estimated to be small".

Rates. Gilts yields on all horizons ticked lower on announcement, although seemingly reversing at the time of writing with 2Y and 10Y now trading at respectively 3.4% and 3.3%. Like us, investors seem to interpret today's meeting as dovish as the peak rate was pushed lower to 4.5% in June/August 2023 from 4.57% yesterday. Our base case remains that of a peak in the policy rate of 3.75% in February 2023.

FX. EUR/GBP initially moved modestly higher upon announcement to 0.8630 from 0.8600, as expected but partly retraced the move afterwards. We see a case for the EUR/GBP cross to move modestly lower as a global growth slowdown and the relative appeal of UK assets to investors are a positive for GBP relative to EUR.

Our call. We continue to expect the BoE to deliver a final 25bp hike in February. Our expectations fall below current market pricing (currently 100bps until August 2023) as we expect the rest of the BoE committee to eventually turn less hawkish amid a weakening growth backdrop and easing labour market conditions.

Markets

The ECB raised its key policy rates by 50 bps, bringing the deposit rate at 2%. The central bank sticks to its hawkish guidance saying that they aim to significantly raise them further at a steady pace based on the substantial upward revision to the inflation outlook. During the Q&A session, ECB Lagarde said that a steady pace means increments of 50 bps – a stark difference with yesterday’s Fed message suggesting a downshift to 25 bps from next year onwards. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. The ECB raised its average CPI forecasts for the 2022-2024 period from 8.1%-5.5%-2.3% in September to 8.4%-6.3%-3.4% with the first indication for 2025 at 2.3%. Inflation is thus set to remain above the 2% inflation target over the policy horizon even as the ECB will go into restrictive territory from next year onwards. Underlying core CPI is expected to average 3.9% this year and rise to 4.2% in 2023, before moderating to 2.8% and 2.4% in 2024 and 2025 respectively. Risks remain primarily to the upside, especially in the near term. The central bank puts forward a relatively short-lived and shallow recession with growth forecasts at 3.4% this year, 0.5% next year, 1.9% in 2024 and 1.8% in 2025. Higher interest rates will from March 2023 onwards be complemented with an end to the reinvestment policy of the roughly €3.2tn APP portfolio. The decline will amount to €15bn/month on average until the end of Q2 2023 and its subsequent pace will be determined over time. The ECB’s hawkish message hit complacent markets in the face. German yields add 8 bps to 26 bps on a daily basis with EUR/USD feeling the tailwind and surging beyond 1.07. European stock markets lose 3%.

The Bank of England followed the downshift to 50 bps, lifting the policy rate from 3% to 3.5%. Three out of nine governors dissented. One in favour of a 75 bps hike and two in favour of unchanged rates. BoE governor Bailey confirmed that the majority judged that further increases will follow should the economy evolve broadly in line with the November projections. Inflation may already have peaked, but risks remain very high in the next few months and located on the upside. The BoE expects the UK economy to be in recession now with fiscal stimulus raising the end of 2023 GDP forecast by 0.4%. The central bank pointed at last month’s reference to the market implied policy rate path, which by that time was thought to be too aggressive. Market pricing shifted downward since, expecting a 4.5% policy rate peak by mid next-year, something the Bailey and co can align themselves with. UK yields fell around 5 bps across the curve with EUR/GBP moving away from the 0.86 big figure and the ECB accelerating the move.

News Headlines

Norway’s central bank lifted its policy rate by an expected 25 bps to 2.75% today. The Norges Bank said that the previously delivered tightening started to have an effect on the economy, perhaps even more than expected in September. Mainland growth was revised lower to 0.6% for next year and 2024. This hangs in the balance with a slightly tighter labour market than anticipated and above-target inflation of 6.5% (5.7% core) in November. Monetary policy-relevant CPI forecasts were revised upwards in 2023 (5.2%), 2024 (3.6%) and 2025 (2.7%). On balance, the Norges Bank believes additional tightening will be necessary in Q1 2023. It remains data-dependent but for now kept the expected terminal rate at 3%, meaning the cycle may be close to the end. All in all, the December meeting held little new information, causing few ripples in Norwegian swap rates and the krone. EUR/NOK trades slightly higher, just north of 10.4.

Switzerland, 50 (basis) points. The SNB brought the policy rate to 1% today and with it a straightforward analysis. Inflation (3% in November) declined in recent months but remains above the 2% target. New forecasts see inflation dipping from 2.4% in 2023 to 1.8% through 2024 before picking up again to 2.1% in 2025Q3. Hence the need for further rate hikes, even as growth is seen at a mere 0.5% next year with risks mainly tilted to the downside. The SNB stays committed in intervening in FX markets to support the franc to achieve the “appropriate monetary conditions”. SNB president Jordan during the press conference said the central bank has indeed done so in recent months. EUR/CHF trades unchanged at 0.9875 with a slightly stronger euro post ECB keeping the franc in check.

Euro is given a further boost after ECB President Christine Lagarde said in the the post-meeting press conference that "interest rates will still have to rise significantly and at a steady pace." She added, "Obvious that we should expect 50 bps hikes for period of time." The clarity of Lagarde's message was a rather big surprise to the markets.

EUR/CAD's rally accelerates to as high as 1.4591 and it's on track to 161.8% projection of 1.2867 to 1.3694 from 1.3270 at 1.4608. Firm break there will put focus to key long term fibonacci level of 1.6151 to 1.2867 at 1.4897.

Daily Pivots: (S1) 1.0635; (P) 1.0665; (R1) 1.0711; More...

EUR/USD's rally continues in early US session and intraday bias stays on the upside for 61.8% projection of 0.9729 to 1.0481 from 1.0289 at 1.0754. Firm break there could prompt upside acceleration to 100% projection at 1.1041. On the downside, break of 1.0604 minor support will turn intraday bias neutral first. But further rally will remain in favor as long as 1.0481 resistance turned support holds.

In the bigger picture, focus stays on 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Rejection by 1.0609 will suggest that price actions from 0.9534 medium term bottom are developing into a corrective pattern. Thus, medium bearishness is retained for another fall through 0.9534 at a later stage. However, sustained break of 1.0609 will raise the chance of trend reversal and target 61.8% retracement at 1.1273.

Daily Pivots: (S1) 1.2365; (P) 1.2405; (R1) 1.2469; More...

Intraday bias in GBP/USD is turned neutral with current retreat. On the downside, break of 1.2205 minor support will indicate short term topping, bearish divergence condition in 4 hour MACD. Intraday bias will be turned to the downside for deeper pull back to 55 day EMA (now at 1.1860). On the upside, though, break of 1.2445 will resume larger rise to 1.2759 medium term fibonacci level next.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248. This will remain the favored case as long as 55 day EMA (now at 1.1860) holds.

Daily Pivots: (S1) 0.9207; (P) 0.9253; (R1) 0.9290; More...

USD/CHF continues to lose downside momentum, but there is no sign of bottoming yet. Intraday bias stays mildly on the downside for 61.8% projection of 1.0146 to 0.9355 from 0.9545 at 0.9056. However, break of 0.9378 resistance will indicate short term bottoming and turn bias back to the upside for 0.9545 resistance instead.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 might be a medium term down trend itself. Sustained break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 0.9545 resistance holds.

Daily Pivots: (S1) 134.66; (P) 135.32; (R1) 136.13; More...

Intraday bias in USD/JPY remains neutral first as range trading continues. On the downside, firm break of 133.61 support and 133.07 medium term fibonacci level will confirm resumption of whole fall from 151.93. On the upside, however, break of 137.95 will turn bias back to the upside for stronger rebound to 142.24 resistance instead.

In the bigger picture, price actions from 151.93 medium term could be just a corrective pattern to up trend from 102.58 (2021 low). Strong support from 38.2% retracement of 102.58 to 151.93 at 133.07 and 55 week EMA (now at 131.71) will set the range for such corrective pattern. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

Daily Pivots: (S1) 0.8576; (P) 0.8596; (R1) 0.8617; More...

EUR/GBP's break of 0.8674 resistance indicates short term bottoming at 0.8545. Intraday bias is back on the upside for 0.8827 resistance. Firm break there will argue that whole decline from 0.9267 has completed and turn near term outlook bullish. Nevertheless, risk will stay mildly on the downside before break of 0.8827.

In the bigger picture, current development suggests that fall from 0.9267 is a down leg inside long term range pattern. Deeper fall could be seen towards 0.8201/8338 support zone. But strong support should be seen there to bring reversal. Nevertheless, firm break of 0.8827 resistance will turn favor to the case that such decline is merely a correction in the up trend from 0.8201. That is, further rally would be seen at a later stage through 0.9267.

Daily Pivots: (S1) 1.5497; (P) 1.5550; (R1) 1.5619; More...

EUR/AUD's strong break of 1.5747 resistance confirms resumption of larger rally from 1.4281. Intraday bias is back on the upside. Next target is 61.8% projection of 1.4281 to 1.5704 from 1.5271 at 1.6150. For now, outlook will remain bullish as long as 1.5441 support holds, in case of retreat.

In the bigger picture, as long as 1.5271 support holds, rise from 1.4281 medium term bottom is expected to continue to 1.6434 key resistance next. However, firm break of 1.5271 will argue that such rebound has completed, and keep medium term outlook neutral at best. But in this case, more range trading should be seen above 1.4281 low first.

EURCHF remained on the sidelines on Thursday following the ECB policy announcement, completing a symmetrical triangle below the 200-day simple moving average (SMA) at 0.9868.

The formation occurred within a short distance above the 7½-year low of 0.9551, with the momentum indicators currently flagging a neutral-to-bullish bias. The RSI is moving horizontally marginally above its 50 neutral mark, the stochastics – although pointing upwards – maintain a neutral trajectory between their 20 and 80 levels, while the MACD is stable around its red signal line.

For the bulls to get full control, the pair will need an advance above the triangle and beyond the 200-day SMA, which is currently lying around the 50% Fibonacci retracement of the June-September downfall at 0.9958. If the recovery extends above the 1.00500 constraining zone, the next target will be the 61.8% Fibonacci of 1.0160.

A step beneath the triangle’s lower trendline, where the 38.2% Fibonacci of 0.9827 and the shorter-term SMAs reside, may initiate a new bearish wave towards the 0.9700-0.9655 territory. Some consolidation could follow around the 0.9600 and 0.9500 numbers before the 2022 low of 0.9551 shows up on the radar.

Summarizing, EURCHF could become volatile in the coming sessions as a symmetrical triangle nears a completion. A sustainable rally above 0.9950 could give the lead to the bulls.