Rates Spark: Bank of England likely to join the hiking club
The Bank of England (BoE) is poised to join the ongoing trend of monetary tightening, primarily driven by persistent inflation pressures. Per the full note from ing-think, the BoE is likely to hike rates by 24 basis points due to strong inflation indicators, notably a 4% reading for October. Current sentiment suggests a supportive backdrop for European government bonds, influenced by easing Brent crude prices. The overall consensus among firms indicates a median target of 1.15 for EUR/USD by December 2026, presenting a mix of outlooks within the market that reflects existing inflation concerns and upcoming monetary policy adjustments.
What the desk is arguing
The desk believes the BoE's imminent rate hike signals continued vigilance against inflation while providing a more favorable landscape for EUR/USD. As highlighted in the commentary, energy prices are a significant concern, and with recent data showing UK inflation at 4%, market participants are adjusting expectations for tighter monetary policy. The 24 basis points already priced in points to a growing consensus on the inevitability of further tightening to manage inflation pressures.
Bond markets are responding positively, with the slight easing of key yields indicating a potential stabilization ahead. For instance, 10-year Bund yields have recently dipped below 3.3%, reflecting a shift in sentiment towards government bonds in light of more favorable energy prices. This backdrop sets the stage for further movements in EUR/USD and related pairs.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.15, with a spread among firm targets ranging from 1.1162 to 1.2000 by December 2026. Specific firm targets include: - rabobank: 1.1800 - commerzbank: 1.2200 - hsbc: 1.1000
The desk's view is slightly optimistic compared to the consensus, indicating a stronger end-of-year position relative to some of the lower targets observed among firms like investec at 1.1700 and lloyds at 1.1200.
How other firms see it
Firms aligning with a bullish outlook include cibc, targeting 1.2200, while those moderately bearish include anz, projecting a target of 1.1700. Lloyds remains on the cautious side with a lower forecast at 1.1288 by June 2026.
This perspective on the BoE's rate decisions fundamentally intersects with the broader EUR/USD trajectory, emphasizing the influence of central bank policies on related currency pairs like GBP/USD and the volatility expected leading up to major economic data releases.
What the calendar says
With no immediate high-impact events in the coming weeks, focus shifts to how the market will digest the implications of the BoE's decisions when they occur. Traders should remain alert for any shifts in data releases that may trigger recalibrations in rate expectations, particularly around inflation readings.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The BoE is likely to hike rates in response to 4% inflation.
- 02Current EUR/USD consensus target is 1.15 by December 2026.
- 03Easing energy prices are positively impacting bond markets more broadly.
- 04Market sentiment indicates a shift ahead of potential tightening measures from central banks.
Market implications
Watch for EUR/USD testing levels around 1.125 as geopolitical and economic developments unfold. Should Brent prices remain subdued, further support for the euro may develop leading up to the next phase of monetary adjustments from the BoE.
Risks to this view
Any sharp rebound in energy prices could reignite inflation concerns, leading to a re-evaluation of rate hike expectations. Additionally, if upcoming data significantly deviates from projections, it may alter market sentiments and pressure EUR/USD to lower levels.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
Articles Rates Spark: Bank of England likely to join the hiking club Published 08:00 Rates Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download A win for the Democrats helped Brent oil ease below $100, benefiting European government bonds. But we cannot ignore a 4% eurozone inflation reading, showing higher energy costs are already passing through the economy. The same story applies to the UK, where the Bank of England will likely hike rates.
But with 24bp already priced in, this won't be a surprise Benjamin Schroeder and Michiel Tukker The Bank of England will likely have to hike today given still elevated energy prices Euro rates like oil sliding below $100, but doesn't change 4% inflation reading Market sentiment remains positive after Democrats won back both houses of Congress. The feed-through into European government bonds works via a noticeable easing in energy prices, with Brent sliding well below the US$100/bbl mark. It eases the pressure on the ECB as markets see a greater chance that meaningful second-round effects can be avoided.
Front-end inflation swaps have dropped noticeably over the past few sessions, and the money market curve now only expects a little more than 50bp of tightening by summer next year. There is still a contrast to printed inflation, where we saw headline inflation rise to 4% in October with yesterday’s release. We believe tensions will continue to be a source of volatility until time and data give markets more certainty about where we land.
Meanwhile in bond markets, 10y Bund yields slid below 3.3%. The 10y OAT/Bund spread has eased below 150bp, tightening more than 10bp on the day. We had pencilled in some spread tightening towards the end of the year mainly on the expectation that a 2027 budget showing some deficit consolidation will be passed, even if only by decree.
But beyond that, the uncertainty ahead of the looming presidential election should leave spreads on wider levels still. Higher energy prices force a hike from the Bank of England With energy prices still elevated, we think inflation could reach 4% early next year, which means a hike by the Bank of England (BoE) is warranted. A hike today won’t come as a surprise, with 24bp already priced in, but we are less convinced about the need for more hikes thereafter.
Markets take a more hawkish view and price in almost three more hikes after today. We don’t expect a significant repricing of rates based on today’s meeting, as much will depend on inflation data. Markets have become less correlated with oil and we think each inflation release in the coming months will be anxiously watched for second-round effects.
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