Come to the end of the road?

Market reports
Thanim Islam
  • Are we at the end of the global interest rate cycle?
  • Fed hikes by 0.25% and stance is on data dependency
  • US numbers in focus as well today


GBP continued to retrace higher following its losses last week tracking yields on gilts higher and USD lost ground ahead of the Fed meeting. We mentioned yesterday that bets in the options markets were rising and that today's interest rate hike by the ECB could be the last. To add to this during the afternoon it emerged that traders were even betting for the ECB to cut interest rates all the way down to 1.5%. Even more attention will be paid to the ECB meeting today.

The Fed hiked by 0.25% as widely expected last night but these comments, seemed less hawkish than before with an emphasis on the Fed “could afford to be a little patient” and that the Fed was “not in an environment where we want to provide a lot of forward guidance”. This suggests that any additional rate hikes would be data-dependent. The next Fed meeting will be on September 20th and before that, we have two inflation reports and two job reports. Yields on treasuries tracked lower following the Fed meeting last night with mild weakness on USD.


Market rates

* Daily move - against G10 rates at 7:30am, 27.07.23

** Indicative rates - interbank rates at 7:30am, 27.07.23

Data points


  • None today.

Our thoughts

In light of recent data suggesting cracks were showing in the eurozone economy as well as comments from several members of the ECB suggesting that another interest rate hike in September is not guaranteed, today's ECB meeting will be very interesting. The base case is for the ECB to hike by 0.25% and attempt to show a hawkish tone with a reliance on data to dictate whether the Bank will hike by another 0.25%. Ahead of September's interest rate meeting, there will be two further inflation prints. As mentioned in the last couple of days, options markets are betting that today's rate hike could well be the last and the extent of rate cuts by the ECB could be far more than what money markets are pricing in. Given all the above, markets will be really listening out to any dovish cues from the accompanying statement and if so we are likely to see more EUR weakness. If the ECB manage to hold their nerve and convince markets that there is still a chance of another hike in September then could see the EUR gain.

Whilst the ECB will take headlines today, we also have a string of US numbers today in the form of the core PCE inflation numbers as well as the GDP numbers for the second quarter. Given the data dependency stance from the Fed, higher figures from both will likely add to more demand for USD.

Chart of the day

Today's ECB meeting will be all about the message the ECB give with regard to future rate hikes. In recent days, options markets have been increasing bets that today’s rate hike could well be the last hike with some even betting that by June 2024, interest rates will be down to 1.5% - which as we can see below is over 2% lower than current market pricing. Should interest rate expectations for next year suggest interest rate cuts, then we would expect the EUR to weaken as well.

Source: Bloomberg Finance L.P.

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