Euro regains control as ECB becomes increasingly hawkish
The price of EUR/GBP should continue to rise again in the coming weeks and could even accelerate its rise in the face of a British economy which is increasingly at risk of falling into recession. Indeed, although the fundamentals of the two economies are relatively similar with positive growth rates, very low unemployment rates and extremely high inflation rates, the advantage seems to increasingly turn towards the single currency. while the outlook for the British economy is darkening very markedly and expectations of monetary tightening by the ECB are strengthening.
In its new economic projections, the OECD foresees British growth still relatively strong, at 3.6% this year, but 0% in 2023 due to “depressed demand” and strong inflationary pressures. By way of comparison, the OECD forecasts growth of 1.2% in the United States in 2023, 1.6% in the euro zone and 1.8% in Japan.
This very poor outlook for the British economy suggests that the Bank of England will be the first to become accommodative again, or at least the first to put an end to its monetary tightening.
The European economy should also slow in the coming quarters, but the risk of recession seems lower. This improved resilience of the European economy despite the conflict in Ukraine should encourage the members of the ECB to act more quickly to slow inflation.
The ECB Committee is meeting today and is expected to officially pave the way for the institution to hike rates next month. The magnitude of this first rate hike has yet to be determined. Market participants are pricing in a 25 basis point rate hike, but it’s not impossible that it could be bigger if the next inflation figures continue to soar.